FOOL'S EYE VIEW
Why You Should Still Invest

By Maynard Paton (TMFMayn)
October 24, 2001

Carburton Street, London -- The FTSE 100 has fallen 25% since the start of 2000. And just about every financial commentator has had his or her say on "the state of the market". But whether the talk is of deep bear markets, recessions or V-shaped recoveries, one thing's for sure: You should still be investing on the stock market.

Investors can be broadly separated into two categories -- the passive investor and the active investor.

Passive

Most people fall into the passive category. If you don't yet have the knowledge, inclination, or courage to dabble directly with shares, you're a passive investor.

In this situation, the best course of long-term savings action would be to invest through regular payments in a cheap index tracker.

Why a stock market index tracker? Well, all the evidence shows that over long periods, the stock market has produced returns that far outweigh those offered by common alternatives.

The CSFB Equity-Gilt Study tells us that over the last 80 years or so, the London stock market has returned an average annual rate of about 12% (about 8% after inflation is accounted for). It has far outperformed cash in a deposit account (which has returned nearly 6% per year or under 2% after inflation) and gilts (which are Government bonds and returned about 6% per year or just over 2% after inflation).

Sure, the stock market can be volatile. But over the longer term, the ups and downs are smoothed out. Since 1918, data from the CSFB also informs us that the UK stock market has beaten cash and gilts during:

* at least 75% of all 5-year periods;
* at least 90% of all 10-year periods, and;
* at least 98% of all 20-year periods.

Remember, those saving for retirement via the stock market in the past have had to contend with the Great Depression, the Second World War, the Cuban missile crisis, three-day weeks, the Cold War, Black Monday, the Gulf War, the Russian debt crisis, and a whole load of other worrying events. And also remember that the vast majority of those stock market savers still came out well ahead of the building society!

It certainly makes no sense to postpone any index tracker payments because you think the future is uncertain or because the market has fallen. The future is always uncertain! The market will always fall from time to time! History has shown that bull markets always follow bear markets and recoveries always follow recessions. So deferring index tracker payments now in order to wait for rosier times will probably mean investing at higher market levels further down the line. And what's the point of that?

Active

Now we come to those active investors, the people who are confident enough to make their own buy and sell decisions with shares.

(In this respect, active really means proactively researching and contemplating possible investments, rather than the generally wealth-damaging pursuit of actively trading...)

Here, the emphasis is squarely upon individual companies. To cut a long story short, active investors will investigate a company, and if the corporate prospects are sound and the valuation is right, they'll buy the shares.

So why defer any share investment until the stock market picks up? Think about it. The level of the whole market is a reflection of the level of every share within it. So why should the performance of thousands of other shares (i.e. the direction of the whole market) impact the purchase of the shares you've got an eye on?

Sure, a recession will impact most companies' profits. And that in turn will impact company valuations and their share prices. But economic downturns are all part and parcel of investing. Sooner or later, one will suddenly strike.

A stock picking strategy to be used over many years must be able to cater for the bad times as well as the good. If your share selection philosophy is struggling at the moment, you shouldn't be waiting for the stock market to improve, you should be busy revisiting how you pick stocks.

Just like the index tracker investor, it certainly makes no sense to postpone your stock picking because you think the future is uncertain or because the market has fallen. Remember, the future is always uncertain! Remember too, the market will always fall from time to time!

Just to reiterate, history has shown that bull markets always follow bear markets and recoveries always follow recessions. So yet again, deferring your stock purchases now in order to wait for rosier times will probably mean investing at higher share price levels further down the line. And what's the point in that?

More: Learn About Index Trackers | What To Do In A Falling Market | Getting Started In Investing | How To Build Your Share Portfolio