Independent Pilots Financial Services is part of the Benchmark Capital Group, backed by FTSE 100 company Schroders. Our investment committee often draws upon Schroders vast resources. This piece is written by one of their investment writers.
Wars, disasters, economic strife and political instability have been persistent themes over the last three decades and they can affect people’s attitude towards investing.
In many cases they make an already tough decision to part with your money and invest even harder, leading some to not invest at all. Behavioural scientists have a name for this: loss aversion. They estimate that the psychological pain of losing is about twice as powerful as the pleasure of gaining, hence why some people shy from the risks involved with investing.
Yet as Schroders’ research shows, staying out of the stock market over the last 30 years could have proven costly.
The eroding effects of inflation and historically low interest rates would have eaten away at the value of your money if you decided not to invest. While investing in the stock market carries greater risks [the possibility of your losing all the money you have invested] and volatility [the value of the money you have invested going up and down] it could have boosted your returns.
Of course choosing to invest depends on your personal circumstances and if you are unsure as to the suitability of any investment speak to a financial adviser.
Schroders research found, after adjusting for the effects of inflation:
The chart below illustrates the change in real value each year of £1,000 invested in UK stocks, a UK bank account or left under your bed.
Please remember that past performance is not a guide to future performance. Investing in one geographical region [UK equites] may result in large changes to the value to your investment, which may adversely impact the performance.
In some circumstances, up to £85,000 in a UK bank account is protected by the Financial Compensation Services Scheme.
The last 30 years have included some of the biggest stock market crashes in history.
In 2001, the FTSE All-Share index fell by 13%. It was in the wake of the bursting of the dotcom bubble at the end of 1990s, when highly-rated technology stocks were sold off. But it also coincided with the devastating attacks on the World Trade Centre in New York in September. The period also saw a global economic slump, although the UK managed to avoid recession. The FTSE All Share index was down 22% in the year to the end of 2002.
The global financial crisis of 2008, which began with the gradual collapse of the housing market in the US the year before, led to the worst global recession since the 1930s. In the year to the end of 2008 the FTSE All-Share was down 30%, its worst annual performance since 1989.
The table below illustrates how your investment returns could build up year by year between 1989 and 2017 and shows the damaging effect inflation can have on your wealth. It also shows global events that investors could have used as excuses not to invest in any of those given years.
Nick Kirrage, a fund manager and author on the Value Perspective investment blog, has written often about the danger fear can play.
“People can lose touch with just how bad things have looked and been in the past,” he said. “That can lead to them taking – or failing to take – actions that can harm their personal wealth for decades to come.
“This data shows that investors who had instead opted to stay in cash would have seen their savings destroyed by inflation during a period when the stock market rallied. Quite frankly, there’s many other periods of the last century which offer the same conclusion. Even the Second World War offer decent stock market returns in the US and UK.
“The reality is that there is no ‘perfect’ time to put money into the stock market. If you are holding out for one, you are going to remain in cash forever and, over the longer term, you are likely to be materially worse off as a result.”
The opinions included above should not be relied upon and should not be construe as advice and/or a recommendation. Past performance cannot be relied upon as a guide to the future performance and the value of your money may fall when invested.