When we invest in shares, we do so in the hope that their value will go up over the long term. Today, the FTSE 100s 15-year record makes that hope look forlorn. But is it really?
Back in December 1999, the FTSE finished the day at its highest ever closing level of 6,930 points. Since then it has come close a couple of times, but as I write today the index of the UKs biggest stocks stands at 6,563 still a full 367 points short of that record.
But you really shouldnt have been surprised by such a fall, and if youve been investing sensibly youll still have done well.
Barclays Equity Gilt Study
The folks at Barclays have been publishing their annual Equity Gilt study every year since 1956, analysing investment trends since 1899 and every year it provides statistics comparing equities (shares), gilts (government bonds) and cash.
Cash comes nowhere near the other two. And while gilts are less volatile, they dont approach the returns we can get from shares.
In fact, over rolling 10-year periods, shares have beaten gilts 79% of the time. And over 18-year periods the success rate climbs to 88%.
The converse is that shares will underperform over 10-year periods 21% of the time, and 12% of the time over 18-year periods. And thats why we should not have been surprised by the 15-year fall in the value of FTSE 100 shares during a lifelong investment timescale, its almost inevitable that youll experience at least one such period.
Still profitable
The surprising thing is, if youd invested sensibly youd still be nicely in profit.
If youd gambled all your worldly worth on that one fateful day at the end of 1999, just before the dot com bubble burst and before we were plunged into Gulf Wars followed by the banking crisis and the worst recession in decades, and you didnt invest a penny before or since well, that would have been unlucky timing.
But if youve been squirreling away your savings regularly over a long period, youll have bought more shares during the downturns and fewer at the peaks. And once dividend income is included, youll have come out ahead even during such a torrid period.
Over the past 10 years, according to Barclays, shares would have given you an annualised real return of 5.5% per year compared to only 2.5% for gilts. And over 20 years youd have had 4.1% per year compared to 3.5% not a great outperformance, but if that includes one of the worst periods for shares in living memory then its still been a good time for shares!
Its dividends that make all the difference. 100 invested in shares in 1899 would be worth only 191 today in real terms purely on share prices but with dividends reinvested it would have soared to 28,386!
How to win
The way to beat the dips is clear. Make regular small investments rather than one big one, diversify your portfolio to include some safe dividend stocks, reinvest your dividends and above all else, stick with it for the long term.
Have I convinced you yet that it pays to ignore the short-term ups and downs of the stock market and instead concentrate on the long-term wealth that can be yours by regularly investing in shares?
Well, get yourself a copy of the Motley Fool’s 7 Simple Steps For Seeking Serious Wealth report — it looks in more detail at how a sensible strategy over the long term can turn everyday savings into something worth talking about.
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