For many people, the thought of investing in the markets can be scary, perhaps even more so when the stock market reaches an all-time high as the UK and US Stock Markets have done this year. Shouldn’t we just wait for the inevitable market crash and then invest our cash?
Frequently, when it comes to investment decisions, individuals exhibit irrational behaviour where the ‘heart rules the head.’ History shows us that many investors wait for the market to rise before they buy. All too often, when markets fall, inexperienced investors sell their holdings (often at rock-bottom prices) thereby crystallising losses. The ‘frustrated investor’ vows never again to invest in the stock market and, instead, hard-earned money is parked in cash where it is gradually and steadily eroded by inflation. Recent research from Royal London suggests that £1,000 put into cash 10 years ago would be worth less than £900 in today’s money.
When considering an investment, perhaps most importantly, the time-horizon for investing this money becomes key. Every individual will have short, medium and long term financial objectives. For those looking to make a significant purchase in a years’ time (i.e. the short term), putting the funds into a cash account is the sensible option as most alternatives will result in undue risk to your capital that you will not be able to recoup within such a short period. Whilst an investor committing funds for the long term should be less concerned about whether the stock-market is at a record high or whether bonds are currently in ‘bubble’ territory.
At the end of 1999, the FTSE 100 stood at 6,930 points. It wasn’t until the end of 2016 that it finished at a value higher than this (7,143 points). You would be forgiven for thinking that had you invested at the end of 1999 then you would have received only a very modest return during this time (after all, the market rose by only 213 points or 3.07%). However, owing to the magic of compounding re-turns and re-invested dividends, you would have received a return of 85.43% during this time (albeit with a ‘rocky ride’). Had you remained in cash during the same period you would have received a return of just 57.52%* (but with certainty of capital). Remember, that this was seemingly a bad time to invest – i.e. when the market was at a historical high.
Taking a long-term view, history demonstrates that chances of success are high. There is no reason to believe that the same won’t be true in the future. We should, however, stress that returns are not guaranteed and that investing in purely share-based investments is not for everyone – particularly those they may need to access the funds in an emergency.
*Bank of England base rate assumed
Rob Starling is Partner and Chartered Financial Planner with Bluesky Chartered Financial Planners