Interactive Investor

This professional investor is happy with cash for Christmas

17th December 2018 13:15

Douglas Chadwick from interactive investor

This content is provided by Saltydog Investor. It is a third-party supplier and not part of interactive investor. It is provided for information only and does not constitute a personal recommendation.

With Santa having to pull something special out of his sack if the FTSE 100 is to beat where it was last Christmas, Saltydog analyst Douglas Chadwick gives his view on markets and portfolio allocation.

Hunkering down for Christmas

Financial institutions are obliged to remind us that prices can go down as well as up, and we all know that's true. However, after a couple of good years, it's easy to fall into the trap of thinking that, although there will be ups and downs during the year, things will be OK in the end.

At this time of year we often see a surge in the markets, starting in the lead up to Christmas and then continuing through until the New Year. This phenomenon is known as the Santa Rally.

In 2016, the FTSE 100 started December at 6,784. When it closed for Christmas, on the 23rd December, it was up at 7068 – a gain of over 4%. It then went on to finish the year at an all-time high.

A similar thing happened last year. On the 1st December the FTSE 100 opened at 7,327. It closed for Christmas on the 22nd December at 7,593 - up 3.6% since the beginning of the month. It then went on to finish the year at an all-time high (again), having gained 7.6% during the year.

Our short-term memory bias tends to give our more recent experiences more significance than things that happened longer ago. The fact that the last two years have ended so well makes it easy to think that it's always the case. It certainly feels like stockmarkets have been going up steadily since the financial crisis of 2007 -2008.

Even that's not strictly true, although on the whole market values have increased most years and the gains have been more significant than the losses.

Here's a table showing the value of the FTSE 100 when it has closed for Christmas.

Source: interactive investor Past performance is not a guide to future performance 

So where do we stand this year? Well we've still got a few days to go, but Santa is going to have to pull something rather special out of his sack if we're going to see the FTSE 100 ahead of where it was last Christmas.

Last week it closed at 6,845 – it would have to go up by nearly 11% to get back to last year's Christmas figure, and more than 12% to end this year ahead of last year. That sounds like a big ask.

Although the drop is unlikely to be anything like the fall that we saw between Christmas 2007 and Christmas 2008, when the FTSE 100 fell by 35%, this year could still be worse than 2011, 2014 and 2015.

Over the last few months we've seen market volatility rising, while valuations have been falling. Our demonstration portfolios are holding between 65% and 80% of their value as cash, and I do not see that changing significantly between now and the New Year.

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These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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