Scott Taylor's Blog

A few months ago, I read that some advisers were advising their clients to stay out of the market until the FTSE100 dropped to 5800. At the time I remarked that it seemed quite brave and I try to avoid being a hostage to fortune. I wonder, today, how their clients feel having confidently encouraged to buy shares at 5800 now we are at 5500. There is something about the human condition that is drawn to people who confidently assert how the future will pan out, there must a deep seated need to remove the uncertainty. It seems that modern day soothsayers are every bit as important to society as their ancient forbears. When will we treat with suspicion those who know what lies ahead? You can barely watch the TV News without having to hear some ‘expert’ telling us what will happen next week, month, year. It is something of a pity that we don’t have an end of year review of their accuracy. People have launched (initially) dazzling investment careers on the strength of a lucky guess only for them to end up with feet of clay. One ladies investment club in the US even sold a truck load of books and made many a speaking engagement with very highbrow endorsement before it transpired that the treasurer had miscalculated their returns. Thinking that the future is predictable is a sure way to investment disappointment in the same league as long range weather forecasts. All it takes is a butterfly beating its wings unexpectedly somewhere to ruin everything with a hurricane. Far better to plan for uncertainty and believe in the long term. On average, Summer is warmer than Spring but it doesn’t feel it every day. My prediction for the rest of the year? Most market forecasts will be wrong, if only we could tell which ones. I predict steady growth in the number of confident predictions.

With the FTSE100 Index of leading UK listed shares languishing about 15% lower than its level a year ago and stubbornly refusing to regain the highs of 1999, investors may have to look deep into the past to find cause for hope. I have covered it before but the Seventies may have been a great time for fashion and interior design but they were not kind to investors. Falls in investment values, which were not confined to shares, combined with high inflation ripped the guts out of many people’s wealth. The only comfort comes from the fact that because most of the damage was due to inflation, most people didn’t know quite how badly they were doing. The Naughties gave no such crumb of comfort. Not for us high inflation to reduce our debts and mask our problems. And, if you hadn’t bought as much property as you could lay your hands on over the last ten years, you had missed out on the big investment story. Casting our minds back again to the mid Seventies, an investor who entered the market at the end of 1972, say with £10,000 watched his investment drop to less than 42% of its original value (and this is with all income reinvested and no costs at all) by the end of 1974 before springing back during 1975. Ten years after that and he/she would be sitting on nearly £60,000. Unfortunately, many would have bailed out long before then and sat in cash. If our investor had merely kicked back and tracked the UK Stock Market, by now (at least, at the end of last year) they would be sitting pretty with more than £680,000 in their portfolio; sixty-eight times their original stake. Now, it must be remembered that our investors are entirely fictitious, never spent a penny, never paid a dealing commission or tax and didn’t run for the exit when it got tough. But their experience must represent someone’s real life good fortune. In fact, it has nothing to do with good fortune, it’s all about patience. So how did an inflation-adjusted investor fare? Well, even they did pretty well. Their £10,000, sadly placed into the market at the end of 1972, was only worth £3,291 in real terms (i.e. less than a third). But, they too bounced back to celebrate their tenth anniversary in the Stock Market at about even Stevens. If they had hung in there, by the and of 2007 they would have been worth an inflation-adjusted £83,300. Not too bad and still an eight fold increase. Now, it has to be pointed out that the future may be nothing like the past but there is still hope for those who plan on building rather than disposing of their wealth. If history is anything to go by, hanging in there may be the best strategy, not selling to buy oil. I think it was Marx (Karl, that is, the one who has fallen out of favour) who said we are doomed to repeat history, firstly as tragedy and then as farce, although, it could be other way round. The history of the Stock Market should hold no fear for us but repeating investor patterns of buying high and selling low, something to be avoided at all costs.

If you had invested £1000 in the UK Stock Market at the end of 1972, it would have been worth a heart stopping £410 by the end of 1974. Thankfully, by the close of 1975, you would have been back to your £1,000 again. Job done? Not quite, inflation would have reduced its real value to such an extent that it would have taken fully eleven years to get back to square one in real terms. And, before you run for the security of cash, those holding cash at the dawn of 1973 did not see its real value recover for twenty-three years. In both cases, I have assumed all income has been reinvested so for those dependent on their investments for their income, the picture was even worse. So, what’s the message for today’s investors? Well, firstly and rather obviously, you don’t want Seventies style inflation, it’s a killer. Secondly, don’t be lulled into a false sense of security by nominal values, inflation, even at low levels is a corrosive force, steadily eating away at your wealth. With longevity increasing all the time, exposing your income to inflation, for example, by buying a level annuity, could well be asking for trouble. Secondly, in the same way as a small increase in inflation can spell trouble, increasing your return expectations can make a real difference. It may pay to add some riskier investments, such as shares, to your portfolio as a hedge against inflation.