Believe me, personal finance journalism is a difficult profession to remain professional in at all times.
I do not expect you to feel sympathetic towards me – after all, you have your own particular issues to deal with and, of course, journalists are not everyone’s cup of Tetley’s tea, especially among the adviser community – but I am telling you as I find it. As I see it.
In a nutshell, writing with personal finance integrity can occasionally be as difficult as pulling wisdom teeth. The moment takes over and all perspective is lost. Personal finance wisdom – not the teeth – is flung out of the newspaper office window.
We over-react. We exaggerate. We panic readers when we really should not. We let the white noise interfere with our judgement when we know we should ignore it. I can only apologise.
Take recent events in the People’s Republic of China. The last couple of weeks have seen world stock markets shudder in response to a puncturing of China’s phenomenal economic growth.
The engine of world economic growth has started overheating, triggering a meltdown in China’s stock market. Various attempts have been made to bolster the economy, shore up the stock market and boost the housing market. These have taken the form of devaluing the currency, allowing state pension funds to buy shares and detaining any individuals seen to be manipulating the market. So far all attempts have singularly failed.
The knock-on effect outside the People’s Republic has been serious. Stock markets here, in the US and in most emerging markets, have behaved like giant yo-yos as fears grow that world economic growth may now grind to a halt. Even that horrible ‘r’ word – recession – has reared its ugly head again.
Stock markets have behaved like giant yo-yos as fears grow that world economic growth may grind to a haltLast month, shares in the UK’s 100 biggest listed companies fell 6.7 per cent, with most commentators expecting markets to remain significantly volatile for the foreseeable future. One specialist, David Buik of stockbroker Panmure Gordon, said a stench of fear now hung over world stock markets.
Meanwhile, Christine Lagarde, head of the IMF, warned that global economic growth this year would be “weaker than we anticipated” – less than the 3.3 per cent it forecast in July.
Against such a depressing backdrop for shares and the world economy, what should investors be doing? Indeed, what should advisers be recommending their clients to do?
Well, if you had acted on everything you had read in the newspapers over the past few weeks – or online - you would probably have fled by now to the nearest air-raid bunker, having cashed in your pension, sold your shares and hidden the proceeds under your sleeping bag. Financial Armageddon, you might have concluded, is nigh.
Once upon a time I may well have used my personal finance pages in The Mail on Sunday to proclaim that capitalism is now dead, that we should batten down the hatches and that cash is once again king. Certainly there is great pressure to make such remarks – to ‘big up’ the financial crisis story.
But this time I did not; I shoved my basic instinct to one side. Instead, I did something that few personal finance journalists are inclined to do. I advised readers to do little – other than to stay calm, to remain in the market, and to think long-term. Hardly a ‘sexy’ story that will sell newspapers – or win over a story-driven editor, but the right message all the same.
In fact my message to readers was exactly the same one being sent out to clients by many IFAs up and down the country. Provided your portfolio is sufficiently diversified – across both markets and assets - do nothing. It will all pass. Do not panic. Do not crystallise paper losses.
Not one IFA I spoke to recommended that investors should sell. “Don’t get tied up in knots over this,” barked Alan Steel of Linlithgow-based Alan Steel Asset Management.
Two sets of statistics support this ‘stay calm’ strategy. One is provided by Alan Miller of SCM Direct, based on research from financial data company Dalbar.
It shows that over the past 20 years, the annualised return from the Standard & Poor’s 500 Index was 9.9 per cent. In contrast, the average equity mutual fund investor in the US earned just 5.2 per cent. The gap is primarily down to the timing of investor trades – buying after market rises, selling after falls.
“You have to stick to your investment beliefs,” proclaimed Miller. “You also need to remember the goal is what will provide the best long-term gains.”
The other, probably of more relevance, was issued by investment house JP Morgan Asset Management. It said that an investment of £10,000 20 years ago in the FTSE 100 Index would have generated a pot of £41,236, equivalent to an annual return of more than 7 per cent.
But if an investor had missed just the 10 best days of market returns, their pot would only be worth £21,347.
“Rather than making usually futile attempts to time the market, focus instead on taking the emotion out of decision-making and stay invested for the long term,” said JP Morgan’s David Stubbs, global market strategist.
Nick Murray, an American investment sage whom many financial advisers draw inspiration from, says buy and hold is the best way forward for most investors – provided they have a diversified portfolio and are prepared to rebalance it periodically.
Spot on. Buy and hold. Boring, yes. Sensational, no. Keep preaching it dear advisers. I am four square behind you.
Jeff Prestridge is personal finance editor of the Mail on Sunday
