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MARKET COMMENT
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I'm an investor...get me out of here! That seems to be the clear message from many Fool discussion boards at the moment. And no wonder, since the stock market is set to record its third straight annual decline --something not seen since the 1940s. During times like these, it pays not to capitulate, but to go back to basics instead: 1. Long term, shares win Shares win out over the long term. Going back to 1869, various studies show equities outrunning cash and gilts by an average of around 5% per year (adjusted for inflation). Of course, the stock market is not a smooth ride. But the longer the holding period, the better off you'll be. The market has beaten cash in all but 9 of the 114 10-year periods since 1869 and all but 6 of the 20-year periods. Even where cash has won over 20 years, it has never been by a margin of more than 1% per year. When you get up to 30-year periods, then the stock market has never lost (since 1869 at least). The lesson? Don't over emphasise the stock market's recent performance. If you have an investing horizon that runs into decades, think how shares have performed over similar timescales in the past. Remember why trackers beat cash and why you should still invest. 2. Picking winning shares is difficult While the market as a whole wins over the long term, no individual share holds any such promise. Your handpicked portfolio may have done well during the late 90s bull market, but bear markets tend to reveal just how skilful you really are. As the Fool readily admits, consistently beating the stock market by picking your own shares is very difficult. Indeed, there's no shame in thinking this whole stock picking lark is more trouble than it's worth. Quite the opposite, in fact. It cannot be emphasised enough that the most Foolish investment decision in existence is the low-cost index tracker. Stock market guru Warren Buffett agrees: "By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb." Are you trying to be far too clever with your portfolio? Consider being dumb instead. 3. The case for intrinsic value Is your portfolio a sea of red? If so, you've made some investing mistakes, right? Wrong. All too often, investors buy into a share, only to see it drop by, say, 30%. They suddenly think they've made a mistake and quickly sell out. However, to win on the stock market, you have to believe a share that falls by 30%, other things remaining equal, is now a share that's 30% cheaper. It's all about defining a company's intrinsic value. Of course, shares do fall for good reason -- the underlying company is struggling. However, get involved in the right sort of business, and share price declines will soon be seen as welcome investment opportunities. Companies whose products and industry positions are unlikely to deteriorate long-term -- such as BP (LSE: BP), AstraZeneca (LSE: AZN), Lloyds TSB (LSE: LLOY), Vodafone (LSE: VOD), Unilever (LSE: ULVR) and Imperial Tobacco (LSE: IMT) -- make for ideal top-ups during any stock market panic. In short, identify robust long-term businesses and set a 'good value' anchor to stop you being unduly swayed by a choppy market. ______________________________________________________________________ Help! What Are your Views On Broker Recommendations? The FSA is interested in finding out how private investors use broker recommendations and reports. Please help by completing this short survey. ______________________________________________________________________ More: Why Trackers Beat Cash | Learn More About Index Trackers