MARKET COMMENT
Could You Cope With The FTSE At 3000?

By Stuart Watson (TMFTiger)
November 26, 2002

An interesting interview with Nicola Horlick appeared in yesterday's Financial Times. The fund manager, famous for juggling her high-pressure job in the City with bringing up a gaggle of sprogs, says that a new major terrorist incident could see the FTSE fall to the 3000 level. She added that the fund management industry, apparently still somewhat bloated with staff, needs to be prepared for this eventuality.

She likened it to comments from BP (LSE: BP.)(NYSE: BP) when it said that its business needs to be viable with the price of oil at $12 a barrel, which is roughly half the average price it has traded at over the last two years.

If the FTSE were to fall to 3000 it would represent a drop of some 30% from its current level. If company dividends were maintained, UK shares would offer a payout of nearly 5%. Whether this will come to pass is, of course, impossible to predict. What is more important is to ascertain what effect it would have on your finances if it did actually happen. Would your retirement plans be delayed for example. When it comes to buying individual shares you can draw parallels with Benjamin Graham's philosophy of having a margin of safety built into each and every purchase.

The same principle can be extended to house prices, mortgage rates and, in fact, pretty much every area of your day to day finances. Would you be able to withstand a fall in house prices of 20%, as we saw from 1989 to 1993? Would you be in negative equity and therefore find it difficult to move if you wanted to. Likewise, if mortgage rates rose from their current level of 5% to, say, 7% or even 8% would you struggle to pay the mortgage each month?

Cheery stuff isn't it? Of course most of these scenarios probably won't come to pass. So, in order to keep your finances on an even keel whilst not getting too depressed that the world is about to end, why not adopt the mentality of hoping for the best but preparing for the worst.