Wealth

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Five big threats to your wealth in 2013

A 34pc fall in the FTSE and a big inflation shock are among the key concerns of one expert

Given the rocky ride investors endured, it mostly worked out well in 2012. With the FTSE 100 returning nearly 10pc, with income included, and the FTSE All-Share ahead by 15pc, most fund sectors produced impressive average returns

Funds classed in the mainstream UK All Companies sector returned a typical 16pc while the average fund focused on smaller companies returned 22pc. Even with the turmoil in Europe, funds open to UK investors that focus on the Continent turned in a typical return of 20pc

So can British investors expect an equally profitable 2013? In truth, nobody knows but there are certainly dangers and risks of which every investor should be fully aware

Brian Dennehy, managing director of Fundexpert.co.uk, an investing website, shares his five key concerns for investors in “a world which remains inherently unstable”

Threat 1: Complacency

Surveys of investors are remarkably upbeat, as are fund manager predictions for 2013. This can be seen in measures of volatility, which are extraordinarily low, and even in the very tight spread between Spanish and German government bond yields (hinting at Spain’s problems being over). We have been living through a unique global experiment since 2008, with markets swinging between complacency and crisis. Yet investor complacency suggests that since Summer 2012 future crises have been abolished

Threat 2: Spain

The swing from complacency to crisis and back again has been exemplified in Europe. There is an assumption that austerity is working for Spain. There is an expectation that Spain will officially ask for assistance in the first quarter of 2013. Will Spain accept the conditions? If they do not the apparent stability of the last six months will be quickly undermined. At that point you won’t want to be exposed to funds which are heavy into European bonds – there’s a lot of downside

Threat 3: Footsie at 4000

Fundexpert’s technical analysis continues to highlight that the FTSE 100 index, the UK stock market, has endured a bear market since December 1999, and that it could end with one last move towards 4000 (today it closed a little above 6053 so such a fall would represent a 34pc plunge). The problem is that there are already frequent “Death of Equities” headlines, and a fall toward 4000 could be the last straw for many…just as the market is poised for a run to 7000! If you’ve held your nerve so far, invested into UK equities, do try and see out this potential upcoming turbulence

Threat 4: Inflation shock

This is a particular concern for UK investors, especially the large number heavy in bond funds. There could be an inflation shock from any one or all of the following factors:

• overseas investors lose confidence in the UK as a safe haven, see little evidence of austerity working, and start selling sterling. This increases import prices;

• China recovers more than expected and commodity prices rise sharply (despite the current “End of commodity Supercycle” headlines);

• Israel bombs Iran, oil prices soar;

• a series of weather events destroy a range of crops around the globe.

Fundexpert recommend that you not be too heavy in bond funds, or make sure you’re very close to the exit, or your adviser is on your behalf

Threat 5: Missing out on the growth

A sort of positive to end with, in two parts:

1. UK smaller companies. This was the stand out sector in 2012 that almost no one was buying (in stark contrast to bond funds, at the end of a 30 year bull run!)

This sector still looks good value, it has momentum, and investors risk missing out on a renaissance of smaller companies which is being very profitably exploited by the better fund managers

2. The Indian stock market has also turned a very important corner, the reward for greater clarity over much needed reforms to set India on a very long run recovery. There is almost no demand from UK investors, despite it being more than twice the size of the EU population (including the UK) and with extraordinary potential

Action for investors

Review your portfolio in anticipation of these risks

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