Stick with your stake
LONG-TERM STOCK MARKET REWARDS
STOCK markets have suffered a bumpy millennium as the world has been hit by one crisis after another, but they still remain one of the best ways of generating long-term wealth.
The dot.com crash in 2000, the September 11 terror attacks the following year, the financial crisis in
2008, the 2020 Covid pandemic and now the Russian invasion in Ukraine have all rattled investors.
It is a disappointment after the long bull markets of the 1980s and 1990s, which saw the FTSE 100 peak at 6,930 on December 31, 1999.
More than 21 years later, it trades only slightly higher at around 7,400.
Do not be fooled, investors have still made money in that time.
Most investors will not have put all their money into the market at the top on Millennium Eve, but will have bought shares at much lower levels.
Those who reinvested their dividends to buy more stock, rather than taking them as income, will have done particularly well, said AJ Bell head of investment analysis Laith Khalaf.
“If you had invested in the FTSE 100 on Millennium Eve, and reinvested all your dividends, you will have made a total return of 137 per cent,” he said.
The UK stock market has
underperformed against its global rivals over the last decade, so investors who bought global stocks will have done better. Khalaf said: “If you had invested £10,000 in the average global fund 10 years ago you would have £28,000 today.”
Yet even an investment in the spluttering UK stock market would have more than doubled your money, turning £10,000 into £20,500, he said.
Savers frustrated by the low returns on cash as inflation rockets are also wary of the stock market, amid growing talk of a global recession and share price crash.
Khalaf said that volatility is “part and parcel of stock market investing”.
He added: “The good news is that even if share prices take a big tumble, in the longer run investors should make a healthy profit as shares beat most other asset classes over time.”
Nobody should invest in shares for a period of less than five years, to give them time to recover from any crash.
The longer your investment time frame, the greater the benefits, said Lee Wild, head of equity strategy at Interactive Investor: “Between January 1, 1986, and March 31, 2022, the FTSE 100 delivered a total return of more than 2,010 per cent, from share price growth and reinvested dividends.”
That would have turned £10,000 into a staggering £211,000, although of course its real value would have been eroded by inflation.
Wild said this shows the value of sticking by shares through thick and thin, and resisting the urge to sell in a panic when markets crash.
“Investors with a longer-term horizon should hold onto their shares, keep investing, and wait for stormy waters to settle,” he added.
Avoid the temptation to time the market by second-guessing share price movements. “None of us have a crystal ball, you are relying on luck more than skill,” Wild said.
The last 20 years are not unusually volatile: the 1980s and 1990s saw the Chernobyl nuclear meltdown in 1986, the Black Monday crash of 1987, the Iraq invasion of Kuwait in 1990, and Black Wednesday in 1992, when Britain left the Exchange Rate Mechanism.
Stock markets do crash but always recover in the end.wild said: “To reduce your exposure to volatility, consider investing regular monthly amounts rather than major lump sums.”