Despite a relatively rocky 2023, according to data provided by Timeline, global stock markets produced returns of around 15% for investors for the calendar year, attributed largely to a positive surge in performance over the last few months.
Consequentially, the end of 2023 saw UK investors flock back towards investing in equities as a reaction to their strong performance to end the year. As explained by the Calastone Fund Flow Index (FFI), this followed six months of a vast number of investors selling from equity funds between May and October 2023. Despite this, £449m was invested back into equity funds in November 2023.1
Investors who decided to put their money back into equities at that time essentially chose to buy shares at a higher price than was available throughout the majority of 2023. This got me thinking – is there any other scenario in which people would be happier to purchase something when its price is potentially at its highest? So far, I have not been able to come up with anything! I mean, you wouldn’t wait to buy toilet roll until the price goes up, would you?
For the casual investor, the news and media are the main drivers behind deciding whether or not to invest in equities, painting extreme pictures of negativity and “never before seen” tanking of the market as a whole that will surely never recover – (SPOILER ALERT) even if this is not the truth. Whilst past market performance is no guarantee of future results, historically recovery has always followed periods of poor returns for equities. In reality, aside from taking information from the news, it would take a great deal of time, effort and resources to research market trends, to find and invest in equities that you believe are about to rise in value and help you to attempt to beat the market. This is where active fund managers come in.
SPIVA are a Standard & Poors (S&P) agency who monitor the performance of active funds and their managers against the major global stock markets. According to their data, only 7.81% of active fund managers in the United States were able to beat the market (S&P 500) over the last 15-years*. This trend can be seen for all regions that SPIVA gather data on, including Europe and the UK. Whilst the outlook for active fund managers improves over a one-year period (rising to 39.10% of managers beating the market in the US), consistent replication of these results is apparently impossible for the overwhelming majority. And these fund managers are afforded the time, effort and resources that I alluded to earlier, whilst still achieving poor results for those who invest in their funds.
The Timeline portfolios that the majority of our clients are invested in are called tracker funds. These essentially track the major global stock markets, aiming to achieve as close to market returns as possible with the aim of beating inflation, rather than beating the market itself. If you can’t beat them, join them! After all, we are trying to ensure that your money maintains the same purchasing power for decades in the future, to which inflation is the primary threat. The UK’s main stock market index, the FTSE 100, averaged an annual return of 7.3% from 1993 to 2023, with the average annual growth of inflation sitting at only 2.1% over the same period2. The FTSE 100 provided average annual returns that more than tripled the growth of inflation. We believe that equities are the asset of choice when it comes to beating inflation over a long period of time.
If you have met with Dominic or myself in the recent past, you may have heard us refer to the importance of “time in” the market rather than “timing” the market. Leaving funds invested in equities for a prolonged period of time, which we would normally define as at least five years, affords your investments the time to recover from the inevitable, periodic falls that are certain to happen. It’s our job to help you “stay in your seat”, stick to your financial plan and remind you that these phases will come and go, just as they always have. Warren Buffett, often considered the most successful investor of all time, once said: “Wall Street makes its money on activity. You make your money on inactivity… it’s just not necessary to do extraordinary things to get extraordinary results.”
If you are a car driver as I know most of you are, the current price of petrol will almost certainly have caused a gulp of disbelief as you fill up your “pride and joy”. The rate of inflation may be a testing 9% or 10% (next release from the ONS is next week) but the price of fuel is rising much faster than that. Indeed, I have noticed the price at a station change within the space of a return trip to a local garden centre.
Today, 16th June 2022 unleaded petrol is around £1.87 a litre or £1.93 for diesel. In June 2020 it was £1.07 and £1.11 respectively. That’s an increase of 74% in a year. If only I could tell you that investments had fared as well, they haven’t. Markets have been very difficult lately, largely since November. Global equities are down 1.48% over 12 months and global bonds are down 12.01%. When the numbers go in opposite directions to our daily reality of the cost of living it becomes alarming.
I am not going to pretend to you that this is easy or that inflation will quickly disappear as the Bank of England appears to believe (returning to around 2.4% in 2024). We could be in for inflation that lasts rather longer than that. Sadly, we are in short supply of good politicians around the world, those that we have seem intent on destroying any sense of self-respect. The “unexpected” war in Ukraine is certainly lasting longer than most expected… which does leave me wondering, who on earth is doing this “expecting”? most of the hard-nosed realists I know do not have much faith in politicians to resolve much at all, other than their own salaries and second jobs.
THE JUBILEE, 1977 AND A 67% MARKET DECLINE
If the Jubilee parties didn’t remind you of 1977, the impending rail strikes and some of the economic data may soon help you to do so. Still, we have learned lessons from the past haven’t we! I imagine that you appreciate that I am being a little sarcastic. Sadly, you and I cannot control very much of what is going on. We can control how we respond. All the lessons of history are that successful investing means riding out the peaks and troughs of the global market cycles. Some of these are very deep and “hurt”. For some context, the average bear market since 1926 fell by -35% and lasted 18 months. Some were worse, some better (hence average). The worst fall was in June 1972, markets collapsed -67% and the bear market lasted 2 years 7 months. £100,000 in 1972 would have fallen to around £33,000 however for those that held their nerve that same £100,000 became £1,207,159 when considered over 154 months (12 years 10 months). That is amazing isn’t it… but so few investors had the patience, confidence or perhaps ability to stay the course. This is not easy, hindsight is easy, the present and an unknown future are “difficult” yet that is the reality of our daily lives. Complex, unknown and full of conflicting messages and competing media.
Today the Bank of England raised its base rate to 1.25%. Let me get ahead of the “news services” and spin this in different ways. Interest rates have increased 25% overnight. The highest for over a decade. This is true, but in the context of interest rates they are half as much as they were in November 2008 (3%). When I started the firm in 1999, rates were 5% (some 333% higher). When I started in this game, they were 10.88% and I have a very real experience of them at 14.88%.
Life changes, your plans may need updating, but your main priorities and principles are unlikely to alter at all. Do get in touch with me if you are concerned. As I may have said, investing is a long-term, a lifelong process. Remember your money should serve you, not the other way around.
You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email email@example.com
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