Information overload hiding a good news story about positive market developments

Saturday 13 October 2012

The media is always keen to make us think that we need to worry about every minute piece of information 24 hours a day, 365 days a year.

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FUNDAMENTALS By Alan Dick

There is an incredible amount of airtime to pad out with pundits' analysis and predictions.

"Well, Huw, as you know shares in Super Duper plc fell by 0.01% today so investors really need to take immediate action to stop the losses before it's too late."

Of course another expert will come along tomorrow telling us the same shares "look like great value just now and are very definitely a strong buy recommendation because ..."While the BBC is always delighted to tell us when "billions of pounds were wiped off the value of investments", it is not so quick to tell us the more boring truth about the long term trends that occur across multiple asset classes over a variety of different time frames. Assets from cash through to shares in emerging market companies tend to increase in value over time. Of course, the news at any one point in time may be good or bad, but over time things are rarely ugly.During the Olympics there was virtually no news on TV except sport, the nation seemed to stop worrying about the state of investment markets and the economy, and markets quietly went up unnoticed. The FTSE All Share Index rose by over 5% between the opening and closing ceremonies. However, aside from the Olympic oasis the general sentiment about investments at the moment is still pretty negative. Many people don't really know what is happening to their investments and that worries them.Recently, I asked several people to estimate the total return from the All Share Index over the preceding 10 years. Some thought it had fallen in value (lost money) others thought it had perhaps gone up a little, but nothing to write home about, and certainly less than the return on cash.You might be surprised to learn that the UK stock market actually rose by 7.57% per annum over that period. In overall terms, that is the same as saying £100 grew to £207 or £10,000 grew to £20,740. The market more than doubled during a period where the news has been almost constantly negative and frightening.I have analysed the FTSE All Share index returns from inception in February 1955 until July 2012. By using a period of 10 years to represent an average long term investor we can split the period into multiple 10-year periods and get a better idea of the range of potential outcomes. The average of all 10-year periods was 12.6% pa. However, real people rarely receive the average return; they either do better or worse than average depending on when they actually invest and withdraw their money.The recent 10-year window from July 2002 to June 2012 saw a return of a little over 6% per annum. This tells us that the returns of the last 10 years have been about half the average level since 1955.So the return from stock market investments in recent years has been well below the long-term average – but in most cases it has still been better than cash and inflation. But if markets do genuinely return to some form of long-term average over time we must expect a period of above average returns at some point in future.It is also clear that even given a 10-year horizon some investors would have lost money investing everything in the stock market. As it isn't possible to predict the future of any individual investment or investment market the best strategy is to carefully construct and maintain a diversified portfolio, holding all of the main asset classes in a proportion that matches your own risk profile and the requirements of your financial plan. This should continue to be reviewed regularly and rebalanced back to the agreed target allocations as required.l Alan Dick is Principal of Forty-Two Wealth Management in Glasgow

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Information overload hiding a good news story about positive market developments

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