Which poll result would tick investors' boxes?

There may be more to shrewd investments than who's in charge at No 10, writes Teresa Hunter

ONE of the questions asked in the run-up to an election is which party will be better for stock markets? The more pertinent question is surely, as a strategy, is "buy and hold dead"?

Conventional wisdom has it that Labour is a disaster for investment performance, whereas markets blossom under the Conservatives. Certainly, the growth in share prices since the turn of the century, when the FTSE peaked at nearly 7,000, has been abysmal if you bought and held trackers.

Yet the picture is slightly better since Labour came to power in 1997, when the index hovered around 4,445. Today standing at 5,743, it shows a roughly 30 per cent increase over the period, admittedly a less than inspiring 2 per cent a year.

The right-wing Centre for Policy Studies claims: "During all the periods in office of Labour governments since the war, equity shares have performed poorly. This happened in 1945-51, 1964-70 and 1974-79 when the indices showed losses of 8 per cent, 13 per cent and 11 per cent respectively after adjusting for inflation."

However, the worst stock market performance during any government of the 20th century was that of the Conservative Neville Chamberlain in the 1930s, when the annual return on equities fell 11.47 per cent.

This tit-for-tat between the parties conceals two fundamental truths. Firstly, the incumbent in 10 Downing Street has much less impact on UK share prices than what is happening in the US or China in today's global economy.

Secondly, those who made money from the stock market over the past decade were active investors who bought under-priced shares and then sold them again when they had risen and were over-priced. Alternatively they invested with an active manager who spotted opportunities to buy or sell and make money for them.

By any measure the last decade has been a rollercoaster for those attempting to build up a nest egg or plan for their retirement. We have witnessed two of the five most serious market crashes for a century over the last ten years. Many funds have gone nowhere. To make money you had to actively trade within the gyrations.

This is a worrying conclusion given the massive switch of pension funds into trackers. More importantly, millions of employees relying on company investment-based pensions are sitting in default funds which have invested 28 billion on their behalf in trackers which simply move up and down with an index which is lower today than a decade ago.

Yet some fund managers have made money by buying winning companies at the right time and price. Over the past year alone, for example, the FTSE 100 has climbed 50 per cent. Tactical investors who sold out and then bought back in again somewhere near the bottom have hatched themselves a golden egg.

"Buy and hold" became an article of investment faith during the past quarter of the 20th century, when it delivered the goods. But then we were in a bull market. When everything is going up, as long as you hang on in there you'll enjoy the ride.

That bull peaked in December 1999 at 6,930, a level the index has yet to achieve again. Some do not rule out a Japan-style bear market for the UK. In the land of the rising sun, the index fell for 20 years. Jettisoning long-held beliefs can be a wrench, but it can be done, particularly if we take a long hard look at how the world has changed. There is no longer any good case for buying the shares of a single company and forgetting about them.

In the old days, individuals would happily trust their savings to such a share class. What could be safer or more rewarding than ICI shares? We have learnt the hard way the extent to which companies come and go, and today's blue chips are tomorrow's fallen angels. Groups seem to be constantly morphing, buying and selling subsidiaries, so that a share you bought ten years ago could be in a predominantly different business today.

The FTSE 100 was itself a very different animal ten years ago, since when 57 of its components have fallen out of the index, with many disappearing completely following mergers. Remember Marconi?

Investment strategies too have changed with the growth of hedge funds and their shorting assaults, which can leave companies vulnerable.

Finally, the "buy and hold" mindset allows no room for selling out at the top. Small investors are famous for never collecting winnings and only cashing in their chips at retirement or death, irrespective of how favourable prices are.

So an investor's best strategy is to find a good tactical investment manager, and ask him to devise a system for taking at least some profits when prices rise, as a hedge against a market dive. This can be done mechanically by setting triggers to sell once the index or price of individual stocks reach a certain level, or a specific level of funding has been achieved.

Barclays Capital's Equity Gilt Study for 2010 says the surplus of global savings over the past decade was responsible for capital imbalances which led to the volatile bubbles and busts.

Worryingly, it warns that this surplus capital could be followed for the next decade by capital shortages, which could see lower asset valuations still. It believes nevertheless that profits will be made in equities – but not, one suspects, by all.