Investment Noise? – Reduce the Volume

The noise in the financial press during 2015 was once again all about equity market volatility and the continued obsession with China and our own FTSE 100.

Not a day goes by (in fact you can watch this stuff second by second on internet feeds if you’ve nothing better to do) without reference to ‘China Woes’, the ‘Oil Price Crash’ or speculation around ‘Interest Rate Rises’ and what it might do to markets.  And during steep market falls the inevitable ‘X £billion wiped off the value of UK Shares’ – failing of course to mention when said billions were added back onto the values, but that of course doesn’t suit the narrative.

So through all the fog and noise, let’s look back at 2015 and consider some facts;

  • Despite the turmoil in August, the Shanghai Composite ended +9.4% over the year
  • The Chinese equity market is far more volatile than ours (hence falls of 7% in one day as I write and another market suspension)
  • The FTSE 100 fell by 4.9% during the year, but that excluded dividends which were broadly around 4%
  • The FTSE All Share (a much better proxy for the UK market) fell by 2.5% during 2015 but again this figure excludes dividends
  • The FTSE 250 rose by 8.4%
  • The FTSE Small Cap Index rose by 6.2%
  • Sterling was weak and turned some foreign equity gains into losses, most notably in Europe.

The big question is ‘so what’? What does all this mean in the context of the way that we all invest be it for our retirements, to provide income to live on or to build a nest-egg for the future? The simple answer is very little.

Short-termism has nothing to do with the long-term nature of investment returns, and in fact such years where there is greater volatility and falls on the equity markets are perfectly normal and, without this volatility, the positive returns would not occur.  Patience and discipline are two principles that are key to successful investment outcomes.

The facts remain that over long periods of time (I would suggest that this time frame starts at 10 years and ends at forever) there is a very good chance, but no guarantee, that assets such as equities and property will provide real growth i.e. above inflation, which is the reason why we all invest in the first place. History tells us that for example over an 18 year period there is a 99% chance that equities will out-perform cash*.

My final point is to remind you all that timing the markets in and out is virtually impossible to do consistently and therefore the most important factor around market noise is how we react to it – or rather that we do not react to it.

As William Bernstein famously said “If you want to earn high returns, be prepared to suffer grievous losses from time to time. And if you want perfect safety, resign yourself to low returns”.

 

Happy New Year.

 

Paul Spires – Chartered Financial Planner

Director – Sound Financial Planning Ltd.

 

*Source Barclays Equity Gilt Study 2015