Glass Half-Full or Half-Empty?

How you view the year ahead largely depends on whether you‘re a 'glass half full' or 'glass half empty' type.  The optimists point to factors such as strong corporate balance sheets, a record sales season and the fact that the price/earnings ratio of the FTSE 100 Index is below its historic average; while the pessimists, highlight the prospect of higher interest rates, slower global growth and high consumer debt.  Naturally your temperament as an investor has a lot to do with how you view any given set of market conditions, but remember, it is impossible to predict what is going to occur in the future and exactly how markets will react to these events.  So, what should one do?

Traditionally, most investors feel worse when they loose money than they do when they miss out on big gains.  It is not unreasonable to argue that the danger of negative equity returns is as great, or greater, than it was at the start of 2006.  Based on this logic it would be better to side with the pessimists, on the assumption that by expecting lower or worse returns in 2007, one can act to protect against this by investing less in equities through asset diversification i.e. investing across a range of different types of investments, including equities, bonds, property, cash and alternatives like commodities, structured products and hedge fund exposure.  You may miss out on a little of the upwards movement in equity markets, but on the flip-side, should markets head south or other asset classes outperform, your portfolio will benefit from the decision to reposition your assets.  Ultimately, in the world of investments, it is better to act early than too late.