Page 14 - DIY Investor Magazine - Issue 27

HOW LONG-TERM INVESTMENT CAN
HELP US COPE WITH SHORT-TERM UNCERTAINTY
The short-term investment outlook may be uncertain, but let dividends pay us to be patient, says Ian Cowie, Personal Finance Editor, the Daily Telegraph.
Investors face extreme uncertainty in the short-term because of the coronavirus crisis and Brexit; taking a long-term view of investment can help us cope with this uncertainty and put our present problems in perspective.
For example, in more than 30 years since this DIY investor began working in the City, there have been several stock market shocks.
These included Black Monday, 1987; the bursting of the dot- com bubble in 2000; and the global financial crisis in 2008. All of them depressed confidence and prices temporarily, causing losses for short-term speculators.
All of them subsequently saw confidence and prices recover, creating wealth for long-term investors.
The past is not a guide to the future but it is interesting to note that the FTSE 100 index of Britain’s biggest shares ended 1987 below 1,780; and closed 2000 below 6,300; then finished 2008 beneath 4,200. At the time of writing, this benchmark of blue- chip shares currently trades above 6,500.1
For example, a major bank has analysed returns from shares reflecting the changing composition of the London Stock Exchange, cash deposits and government bonds since 1899.2
This analysis found that if an investment was held for only two consecutive years, there was a 69% probability that shares would deliver higher returns than deposits and a 67% chance they would beat bonds. Put another way, the probability that shares would do best was over two-in-three.
However, if the investment was held for any period of five consecutive years, shares did better than cash 76% of the time and beat bonds in 72% of these periods. So, holding shares for longer improved the historical probability in favour of them doing best to nearer three-in-four.
Where shares were held for 10 years, they did better than cash 91% of the time and beat bonds 77% of the time.
‘INVESTMENT TRUSTS AUTOMATICALLY DIMINISH RISK BY DIVERSIFICATION’
SPREAD RISK
Investors seek to earn higher rewards than bondholders or depositors by accepting higher risks; share prices can fall without warning and you might get back less than you invest.
Brexit and the coronavirus provide current examples of
how unpredictable events can influence equity valuations and investment returns. Diversification can diminish risk by spreading our money over a wide range of assets to reduce our exposure to setbacks or failure at any single company, country or currency.
‘IN MORE THAN 30 YEARS SINCE THIS DIY INVESTOR BEGAN WORKING IN THE CITY, THERE HAVE BEEN SEVERAL STOCK MARKET SHOCKS’
GET TIME ON YOUR SIDE
The longer you can afford to remain invested, the less likely you are to be forced to sell when share prices are temporarily depressed; that’s why it is sometimes said that you should not invest money in shares that you are likely to need back within five years.
1 Source: ‘A history of the London Stock Market’ George Blakey, Harriman House, plus London Stock Exchange
https://www.londonstockexchange.com/indices/ftse-100?lang=en
2 Source: Barclays Equity Gilt Study 2020
DIY Investor Magazine | Mar 2021 14