A simple glance through a newspaper stand is likely to be greeted with a barrage of confusing financial terms and grandiose numbers. Peppered with jargon such as hedge funds, credit derivatives and sub-prime and complemented by shock titles such as “Stocks lower as jitters continue” (BBC) “Credit Squeeze gives lenders indigestion” (Daily Telegraph) and “Late Sell-Off Hits Wall Street” (FT) the media frenzy can imbue fear in us all.
The Central Banks have to an extent waved a white flag: £106 billion was injected into the markets by the European Central Bank and £30.7 billion by the US Federal Reserve. The willingness of the central banks to intervene, is a two edged sword though. While on the one hand a lifeline, on the other it shows how determined they are that the current crisis does not spread and become a broader problem for the economy.
So with a little background we return to our question: should we all be worried? While criminally unaware, most of us have money invested in the stock markets via our pension funds. The important thing to remember is that these and other market investments are there for the long term. If you take this stance then don’t worry. If investing for the right reasons and you realise that markets are inherently volatile and do have a tendency to fluctuate, you’re still backing a winner.
Of course investment's returns are never guaranteed and some geographical sectors have and will continue to perform poorly. However, the historical evidence is overwhelmingly positive. An infamous book on this area “The Triumph of the Optimists” (Dimson, Marsh and Staunton) provides an insight into how, over the long term, stock market investment has provided returns far above other less ‘risky’ assets. For example £1 in shares invested in 1900 would now be worth £16,160 in nominal terms. The same amount invested in cash, a paltry £149.
Those who do need to worry are the ones looking for a quick buck. As John Kenneth Galbraith wisely said “We have two types of forecasters. Those that don’t know and those that don’t know they don’t know”. Again evidence is on our side. Fidelity, one of the worlds largest Investment Managers, looked at investing £100,000 in the UK stock market over 15 years and showed how important investment ‘faith’ is. If their hypothetical investor has been unlucky to miss just the 40 best days in the market after 15 years they would have worked out a staggering £337,264 worse off.
Some wonderful hyperbole has been written in recent weeks: Dan Roberts in the Sunday Telegraph commented - ”It’s only when the tide goes out that you get to see who’s been swimming with their trunks off.” To those who want to play games in the market the recent turmoil should be evidence that while the water might appear calm it has dangerous rips. If the big boys have, despite millions spent on technology and the best brains to come out of Harvard, Yale, MIT and Cambridge, not managed to second guess the markets, what chance do we have with Dave’s tip from the pub? Don’t worry if you’re in this for the long term. Do if you’re looking for a quick buck.
Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.