MARKET COMMENT
Reasons To And Reasons Not To Invest In The Stock Market

By Bruce Jackson (TMFGoogly)
December 31, 2002

The headline in the Financial Times on December 31st screams "Markets down for third year in a row". They must have been storing that one up for a while, because it's been rather obvious for quite some time that the FTSE 100 and other major world indices would end the year down.

One could argue that a timelier headline would have been "Markets finish 2003 down, but off their low point".

The Financial Times lead article then goes on to describe, amongst other generally gloomy things, how this is really bad for pension funds, the economy and the whole equity culture. A sister piece, titled "Wary investors fear the point of no returns" follows up the lead article by describing how, although many pundits expect 2003 to be an up year for shares, there are plenty of uncertainties, and things could get worse before they get better.

In reading those two prominent articles, one would be rather scared about investing any money into shares, and would perhaps consider withdrawing from the equity market altogether.

There's no denying it has been three hard years for many equity investors. From its peak of 6930 on December 31st 1999, the FTSE has now fallen a total of 44%. Basically, if your portfolio has mirrored the fall in the index, you've practically halved your money over the past three years. If you invested in dud ex-FTSE 100 companies such as Cable and Wireless (LSE: CW.) and Marconi (LSE: MONI), you'd probably have lost more than half your money.

With this sort of portfolio pain behind you, and with seemingly no end to the pain in sight, one can see how it must be tempting to invest in other assets classes (e.g. bonds, gold, property, cash) rather than the stock market.

Here are some of the reasons not to invest in the stock market at the moment.

• Prospect of war in Iraq.
• Global terrorism.
• Property bubble about to burst.
• High levels of consumer debt.
• Global recession / double dip recession / depression / Great Depression II.
• Deflation.

Not very nice thoughts, are they?

Here are some reasons to invest in the stock market at the moment.

• Quite a few individual shares are cheap, especially when looked at on a dividend yield basis.
• The dividend yield on the whole of the FTSE 100 index is 3.6%, more than you'd get in most bank accounts.
• Interest rates may remain at or below their 37-year low of 4%.
• According to the CSFB Equity Gilt Study, since 1869 and including dividends, the UK stock market has never fallen for four years in a row.

They don't seem quite as compelling as the reasons not to invest, do they?

An old stock market saying goes along the lines of "The market climbs a wall of worry". I take that to mean;

1. Over the long-term, the market rises.

2. There are always reasons not to invest in the stock market.

As we approach 2003, and as you consider your investing strategies for the years ahead, it's worth bearing the above two points in mind.

Happy investing in 2003 and beyond.