Cast your mind back a moment to mid-October in 2007. Most world stock markets had reached new highs after recovering from the DotCom bust. The FTSE 100 was just a couple of hundred points short of its record high. Economists were confident that things looked good for a new economic cycle even as the sub-prime crisis unfolded and Northern Rock collapsed, having been given the reassurance of world governments. Perfect.
So – like Rip Van Winkle – you slip off to sleep feeling relaxed about your investments. You wake up this week – 68 months later – and before you have a chance to check your investments, a well-meaning pal fills you in on what you missed during your long slumber.
Apparently you slept through one of the worst property busts in living memory; a financial panic of epic proportions; the worst recession since the Great Depression of the 1930s and the virtual collapse of major banks here and in the US.
How much would you expect to have left of your invest portfolio given all that? Half? A third? Any of it? You open the newspaper hardly bearing to look. What do you discover? To your amazement you find the FTSE 100 is (as I write this) down only 4 per cent since October 2007. Now that ignores inflation and charges, but I’m sure you get the point.
Corporate profits rose by more than a third as you slept while valuation ratios fell and interest rates plummeted. Gold prices jumped more than 80 per cent and oil’s up a third. So do you think equities are cheap or expensive?
Yet experts tell us it’s too late now to invest in them, that another crash is round the corner and that inflation will kill us off, provided rising mortgage rates and energy prices don’t get us first. Remember, they’re the same experts who told us at the bottom of the markets in March 2009 that it was too early to buy in. They’re even comparing share prices now to the dangerous days of 1999 before the Dotcom crash.
Where they get that from is anybody’s guess. Earnings from the biggest companies globally have doubled since then, as have dividends paid to investors with significant cash on top through share purchases or special dividends.
Yet stock markets are now valued at half the price. That’s double the value at a 50 per cent discount. Trust me, there’s no comparison .
I wrote my first article for Smart Money in 1989. What was happening that year? Experts warned of an imminent UK recession while house prices south of the Border fell 16 per cent from the previous year. In October it was reported that recession fears were deepening as “stock markets continued to fall dramatically”.
UK inflation was on its way to 9.5 per cent and interest rates hit 15 per cent, crippling mortgage payers. Elsewhere, 11 million gallons of crude were dumped off Alaska, thousands were killed in Tiananmen Square in China and Soviet Russia still held it’s iron grip .
In October 1989 the FTSE 100 was below 2,100. What is it today? It’s up more than threefold.
The task in my first Smart Money article was to look forward to the following year. Sadly I can’t lay my hands on the original piece, but there’s no doubt I would have been optimistic, looking forward to falling inflation and interest rates and rising stock markets.
To be honest, it wasn’t difficult to be positive at the time. The top song of 1989 was Don’t worry be happy by Bobby McFerrin.
Paying more attention to the words of that song has been miles better for investors over the years than listening to dirges from the pessimists.
The Rip Van Winkles who in 1988 invested their Pep allowance in the new Neil Woodford managed High Income fund and who’ve just woken from a 25-year slumber will be astonished to find their investment net of all costs and taxes will have doubled every five years. Now I can’t promise the same again from similar income funds over the next 25 years – but I wouldn’t bet against it. Sweet dreams!
l Alan Steel is chairman of Alan Steel Asset Management