Hobson: Shares Less Risky than Gold

THE WEEK: Rodney Hobson regrets his bold prediction of last year that the FTSE 100 would not fall below the 6,000 mark - but he remains positive on UK stocks' outlook

Rodney Hobson 5 February, 2016 | 4:06PM
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Regular reader Chris Hardstaff chides me gently for suggesting many months ago that we would not see 6,000 points on the FTSE 100 index again. That prediction has come back to haunt me time and again but I do take consolation from the fact that the market is not, as it sometimes seems, falling but moving sideways.

Since the end of August, when the Footsie plunged back below 5,900 points, we have seen several lurches downwards but all have stopped short of hitting 5,800. Despite all the handwringing, the US, China and the UK are showing decent growth and the Eurozone makes weak but tangible progress.

It is true that a return to what was regarded as normal 10 years ago is fragile. The Fed must be already regretting being bounced into raising US interest rates in December and the Bank of England has moved further away from following suit, since all nine committee members voted for the status quo this week.

The important point is not to join a stampede in either direction. All too often we have seen resource stocks move heavily up or down one day only for them to move all the way back in subsequent sessions.

Thus the remarkable one-day gains made in the sector this week, led by Anglo-American (AAL) up a remarkable 22% at one point, were not a signal to join in but a warning to hold back. Nonetheless, I still believe that there are plenty of buying opportunities out there.

I really should know better, but I forecast that the FTSE 100 will hold above 5,800. Any dip below, if it happens, will be short-lived.

Shares are Less Risky Than Gold

I read this week of a couple who decided that investing in the stock market was too risky. So their financial adviser put them into a scheme investing in land abroad with a promised return of 40% a year.

No prizes for guessing that they lost their life savings. Somehow the link between high rewards and high risk is lost on most people. They think that a high return means they can rest easy at night. The opposite is true.

Foreign land? What about a farm in Zimbabwe: wide open spaces, fertile land and a plentiful supply of cheap, almost slave, labour. What could possibly go wrong? Remember the people who put their savings into Icelandic banks because they were offering two or three percent more?

Yes, shares can go down as well as up but they are comparatively low risk as long as you are investing on a reputable exchange. They are far less risky than gold, which is once again being touted as a safe haven.

As it happens, I suspect this may be a good time to buy gold, which is edging up steadily among the turmoil, just as long as you understand the risk. I repeat: just as long as you understand the risk. If you don’t then stick to shares.

A Load of Rubbish?

You might have thought that trying to bury bad news had backfired often enough but no, along comes waste disposal group Shanks (SKS) oblivious to the real world.

For six mainly chunky paragraphs we read of how well Shanks was coping with the unfavourable market conditions for recycling after the collapse in commodity prices. You had to read down to the end of paragraph seven out of eight to discover that profits will be “slightly below previous expectations”.

So this was a profit warning, albeit a mild one. The shares had already slipped from 112p at the end of last May to around 90p. They promptly dropped another 10p, or more than 10%. Being upfront would probably have been a little less damaging.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.