Independent Financial Advisers and Pension Consultants

TAKE A LONGER TERM VIEW

Experience shows that the stock market generally provides the best returns in the longer term, even though over relatively short periods results can be disappointing, especially after serious shocks like the terrorist attacks on America. Stock market returns are seldom smooth; periods of rapid growth like the late 1990s and early-mid 1980s are often followed by boats of volatility. Over the past couple of years, many people have rightly felt that they would have been better off with their money invested in a hank or building society rather than invested in shares. So what is the point of holding equity investments if you could have fared better with risk free deposits? Investing in equities requires a long term view. The long term trend for shares has been generally upward, but they have never risen without a break. Indeed in 18 out of the last 55 years since the second world war shares have actually fallen. Nevertheless, if you had invested £100 in a basket of leading shares in 1945 and reinvested the dividends each year, by 2001 they would have been worth £41,360, according to investment hankers Credit Suisse First Boston (2001). Even after adjusting those figures for inflation, the value of the shares would have risen by over 17.5 times. In contrast, a cash deposit of £100 invested over the same period would have grown to just £1,430 if the net interest had been reinvested, and after inflation the value would have fallen by over a third. In the last ten years, deposits have provided risk free real returns, hut shares performed much better. Past performance Is not necessarily a guide to the future and the value of equity based investments can go down as well as up. In the past, it is clear that the longer an investor holds equities, the more likely it is that they will outperform the returns from deposit accounts. In its review of the UK stock market in the 20th century, Barclays Capital* concluded that over any two-year period there was a 68% chance that UK shares would outperform deposit accounts; but over a ten-year period the chances of beating the deposit account rose to 92%. So even if the recent short term return from UK equities has been disappointing, in the long term shares have proved to he profitable investments. Meanwhile cash deposits are generally a useful temporary or short term Investment such as an emergency fund. *See Barclays Gilt Equity Study, March 2000.

©2000-2005 Colin Bull Financial Services Limited
Webmaster