12 reasons to keep faith in stocks and shares - Veterinary Practice
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12 reasons to keep faith in stocks and shares

ANDREW NEALE lists the reasons for keeping your head while all around others are losing theirs

IN the current economic climate, one where the FTSE 100 can significantly shift on an almost daily basis, the investor could be forgiven for questioning the value of holding equities.

This is despite many advisers, such as ourselves at ABIC, continuing to recommend the stock market for another five years or more.

In this article we aim to provide investors with 12 reasons why they should remain in shares or possibly consider investing now.

1. Some managers continue to beat the market

Black Rock Gold and General, formerly known as Merrill Lynch Gold and General, is the top performing fund over 10 years, with a total return of 884.8%. While in the UK, Andrew Green’s GAM UK Diversified is up 188.5% over the same period.

2. Shares win over the long term

Whilst it must be remembered that past performance is no guarantee of future returns, it is worth considering that over the long term, 10 years or more, equities have historically outperformed the other asset classes, particularly cash.

Based on a 10-year holding period, equities have a 93% chance of outperforming cash. On an 18-year holding period this is increased to 99%.

3. The effect of dividends should not be forgotten

The FTSE 100 is currently over 16% lower than it was in July 1998; however, if you include dividends being reinvested then this performance is lifted into positive territory with a rise of 14%.

According to Barclays Capital, £100 invested in stocks and shares 100 years ago would now be worth £209 in real terms without dividends reinvested. But his figure would be a truly staggering £25,277 if dividends were reinvested!

4. Time for a bargain?

There are few greater pleasures than getting a bargain when out shopping. However, when this potential is available in the form of stocks and shares very few investors take the plunge.

At the moment UK equities look particularly cheap, with almost 25% wiped off their face value.

Now should be an ideal time for the brave to invest. Of course, there is risk involved in this strategy although this risk is mitigated the longer one is prepared to invest.

5. Use shares to reduce your capital gains tax bill

With equities falling, investors can create capital losses by switching into different funds or shares. These losses can be carried forward indefinitely to future years to offset capital gains.

6. To mitigate inheritance tax

Placing equity investments in trust before they start to recover will protect subsequent growth from inheritance tax. This will mean a potential saving of 40p on every pound of growth.

7. Shares have a better chance of beating inflation

Inflation, as measured by the Retail Price Index, has hit 4.6% which is the highest level since August 1991.Therefore, for investors to beat inflation, higher rate taxpayers need to see gross returns of 7.67% and basic rate taxpayers 5.75% in order to keep in line with inflation.

High income shares can comfortably beat inflation though. BT has a yield of 8.3%, equivalent to 10.37% gross and HSBC pays 6.2%, or 7.75% gross.

Meanwhile, only 12 cash-based accounts will give higher rate taxpayers the returns they need, and only a quarter of savings accounts pay more than 5.75%.

8. Diversify alongside your shares for better returns

If over the last 10 years you had invested in actively managed funds with 51% in equities around the world, 26% in fixed interest bonds, 17% in property and 4% in cash, you would have made 152% against the 33% total returns from a weighted portfolio of indices alone, according to AWD Chase de Vere.

9. Buying at today’s low prices will make more in the long run

Drip feeding money into the stock market helps smooth volatility. Buying in when prices are both low and high helps provide a cushion against market fluctuations.

If an investor had invested £1,200 in the FTSE 100 on 1st August, 2007, it would have been worth £988.82 (ignoring dividends) on 15th July. But had you fed in £100 at the start of each month, it would now be worth £1,009.

10. Stocks and shares investments are not just limited to the UK

Britain and the FTSE 100 are a very small part of the equity market. Companies listed in London account for just 10% of the total market capitalisation of global equities.

Other indexes, particularly those in emerging markets, have powered ahead in the past decade. Hong Kong’s Hang Seng is up by 126.4%, according to Trustnet.

11. There have been strong performing sectors too

A similar principle also applies to sectors: some have performed much stronger than others.

Telecoms and banking stocks have been among the worst hit in the past decade, with shares falling an average of 45.2% and 27.3% respectively.

On the upside, construction and building materials shares have risen by 126.2% and oil and gas are showing returns of 52.4%, which is a positive sign in today’s somewhat turbulent market.

12. And finally … pay attention to Warren Buffet

Warren Buffet, otherwise known as the Oracle of Omaha, is currently listed by Forbes magazine as the world’s richest man. With a personal wealth calculated at $62 billion, he might just know a thing or two about the principle of “value investing”.

Therefore, it might be worth, for those thinking of stocks and sharesbased investments, paying attention to his infamous statement: “Be fearful when others are greedy and greedy when others are fearful.”

  • The author can be contacted at Allchurch Bailey Investment Consultants Ltd, Almswood House, 93 High Street, Evesham, Worcs. WR11 4DU; t6elephone 01386 442597, e-mail invest@allchurchbailey.co.uk; website www.allchurchbailey.co.uk.

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