FOOL'S EYE VIEW
Why You Should Invest

By Bruce Jackson (TMFGoogly)
February 13, 2001

(A version of this article first appeared in October 2000)

A share is a piece of a company, an equal stake in the ownership of an enterprise that exists to create wealth. Out of the 2000-odd quoted on the UK Stock Exchange, it can be quite difficult to pick the right companies -- the ones which will give you a winning portfolio. Given that most professionally paid fund managers fail to do a good job at this, you'd probably be justified in throwing up your hands in disgust and deciding to leave your money in the building society.

There is still a widespread perception that buying shares is risky. And that perception is only encouraged by some of the crazy comments made by some old media commentators. Individually, yes, shares can be volatile, but in an index tracking fund, you effectively have a diverse portfolio of shares that collectively will be very safe.

Don't believe it? Worried about the risk? Surely cash is the safest investment of them all? Here's some facts for you to consider.

• Fact 1 -- You'll be pleased to learn that cash is, in fact, safe.
• Fact 2 -- £100 invested in an index tracking fund in 1945 would now be worth £43,558.
• Fact 3 -- £100 invested in the building society in 1945 would now be worth just £1,376.

It is pretty clear, then, where your money needs to be if you want to maintain or increase its real value over the long term. Based on those numbers, the greater risk is not investing in the stock market.

But be aware that time is the equity investor's best friend. There may be some down years. These are to be expected. Don't put money into the stock market that you'll need in the next 5 years, at an absolute minimum. The longer your time frame the better. For example, according to the CSFB Equity-Gilt Study, since 1869 UK equities have never delivered negative returns over a 10-year period.

Regular Saving

If you are saving over a period, then you are likely to be adding a regular amount, say each month. This has the effect of smoothing out the peaks and troughs in the market and making it even more likely that you'll do better from equities than other investment classes.

• Fact 4 -- £100 invested in equities on the first day of every year since 1970 would now be worth £88,315.

• Fact 5 -- £100 invested in the building society on the first day of every year since 1970 would now be worth £17,644.

Imagine the same scenario as above, where you save £100 per year starting in 1970. However, this time, instead of investing it on the first day of each year, imagine that you actually invested it on the worst possible day in each year. In other words, you found the peak of the market in each year and, for some sad and obscure reason, you chose that day to invest your £100. Pretty damn unlucky but, even in this scenario, equities win hands down over the long term. After five years (ending with the 1974 crash), your equity fund would have stood at £246 and cash at £650. After this, though, equities never look back. From the sixth year onwards, the equity fund is always ahead of cash and, after the full 30 years, the equity fund would be worth £74,302 and the cash fund £17,644.

So, next time the stock market is flying all over the place, the answer is to keep calm, relax, have a nice cup of tea. You should be invested for the long term, and over the long term equities have been the best form of investment, beating cash hands down.

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