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Savers told to normalise investing at all time highs

Savers told to normalise investing at all time highs

Savers should get used to investing into markets at all time highs and resist over-reacting to short-term market movements as a result of Covid, according to LCP.

Dan Mikulskis, partner at consultants LCP, told FTAdviser that investors should stick to their decision making and not be too swayed by “cautionary commentators” urging prudence at a time of high valuations.

Mr Mikulskis said: “At a new all-time high there’s never a shortage of commentators offering cautionary stories, casually mentioning words like ‘exuberance’ or ‘frothy’ and harking back to the 2000 crash.

“This really shouldn’t affect your decision making, investors should be quite happy investing into a market at all time highs.”

He pointed out that when the markets perform well, they tend to continue this growth for a while and investors should be looking to take advantage.

Mr Mikulskis explained that data shows that new peaks do not necessarily signal the top of the market.

He said: “For example, returns following market highs do not differ significantly from average maker returns – and they are often higher. 

“The five-year returns of the S&P 500 index following an all time high are 3 per cent higher on average compared to all five-year periods. 

“The market also spends quite a lot of time at, or near market highs (almost 40 per cent of the time within a few percent of the highs) making this a relatively everyday occurrence that really shouldn’t affect your decision making.”

The importance of not over-reacting

Despite the Covid-19 pandemic having hit markets and businesses around the world, some commentators have argued that it could have been a lot worse.

Ben Yearsley, director of Fairview Investing, noted that the US and Japanese stock markets had performed strongly during the pandemic and that governments have learnt to use fiscal tools to protect the economy.

And even though the FTSE has dropped around 10 per cent in 2020, the UK has had the “sharpest and deepest recession ever” and government debt is still rising, which makes this fall seem not as bad, Mr Yearsley said.

Steve Webb, partner at LCP, said the past year has shown savers why it is important not to overreact to short-term market movements.

He said: “Those clients who were heavily invested in the familiarity of the UK stock market and who were frightened by market falls and determined to avoid further losses will have done very badly this year.  

“But those who were more diversified and able to hold their nerve as markets slumped and then largely recovered will have fared much better.”

Sir Steve suggested the industry should gather data on how the advised population fared during the tumult of 2020 compared with individual investors going it alone in order to highlight the value of ongoing advice. 

amy.austin@ft.com

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