If I had a penny for every time I heard someone say “If only we could predict the future” as they think about investing in the markets, then I’d be giving Warren Buffet a good run for his money.
Having said that, it always strikes me that we actually can go a long way to predicting market behaviour. It’s our ability to look back in time, into the established long-term patterns of the markets that can unlock the key to future returns. The past can provide a good indication of the economic cycles and their effect on future markets across the world.
So what has history taught us?
If there is one thing that becomes clear when you examine the performance of the stock markets, especially in the UK and the USA, it’s that there is a consistent pattern of growth and returns; with world markets more frequently rewarding investors despite periods of economic slowdown and uncertainty.
Over the last 100, in the UK All Share Index, we’ve seen an average annual return of 7%. Obviously there have been years where large drops and gains have occurred, such as 1974, where the index fell 55% and the 1975 bounce back of a 136% increase.
However throughout its history, the standard deviation has been 21.5. Put simply this shows that for 66% of the last 100 years, returns have been between -14.5% and +28.5 with positive returns being delivered in 65 of the 100 years.
Putting your best FTSE forward
On 3 January 1984 the FTSE 100 was created. The FTSE is made up of 100 of the largest (by market capitalisation) companies in the UK; what we often refer to as ‘The Blue Chips’ and are the benchmark by which the stock market is measured and referred to in the UK.
To give you an idea of how The FTSE 100 has performed over the years, in 1984 it started with a value of 1000 and ended 2019 at 7542.44; which was itself 21.1% higher than where it was at the end of 2018.
In terms of really choppy waters, the largest one-day fall of the modern FTSE 100 was on Black Monday 20 October 1987, when the index fell by 12.22%. Whilst following the property and financial crashes of 2008 the annual price return was -31.3%. With the largest annual price return being 35.1% in 1989.
So we can see that although the FTSE 100 experiences its fair share of turbulence, the long terms returns have always been positive growth
The Covid Crash
The markets have seen crashes happen before and they’ve always bounced back. Growth seems inevitable, although the trajectory, like all things in life, has its ups and downs.
However long-term data, both in the UK and in the markets overseas, clearly show that the trend is always one of growth.
Bear and Bull markets are created by panic selling and buying of shares in short-term reactionary reflexes to the growing and checking pains of the economy, both nationally and worldwide.
So if your not into the short termism of Bull and Bear trading, then the trick is to understand the longer-term view, approach the investment markets armed with knowledge and patients and to sit fast in turbulent times and wait for the markets to come back.
Make sure you’re working with a map
I think that the fastest way to ensure you end up on the losing side of the investment market is to just jump in with the hope that prices will rise across the board.
There are always winners and losers in both Bull and Bear Markets and throughout normal trading conditions. The trick is to understand where the potential opportunities and pitfalls are. If you’re not completely confident that you know the markets in the same way as the professional traders do, then please make sure that you are talking to an independent financial expert when seeking advice on any form of investing.
There are some interesting points regarding the FTSE that you need to bear in mind, as they will certainly impact upon its overall performance as the years go by.
For example, the index is never a good indicator of how the UK economy is fairing as a whole, as a many companies listed earn 75% of their revenues from overseas. With almost a fifth of the companies listed involved in mining and oil, all of who will face increased challenges as we move to a more environmentally aware existence, theirs is bound to be a downturn in that part of the index.
There will always be industries that seem to be on the up. Green Energy, Pharmaceutical and Electric Cars spring to mind. History also shows us that their runs will not last. Just think about the dot com boom and what happened to most of those multi-million/billion valuations.
If you’re going to invest by sector, do your homework and seek expert advice. In fact, whatever investments you are thinking of making, speak to an expert independent financial adviser before you do. It could open your eyes to a whole raft of unthought-of possibilities and may save or make you a fortune!
Start with the right advice and stick with it
Please remember that markets can go down as well up and that past performance is no guarantee of future investment returns. But if you are going to invest, do your homework and seek expert advice.
The first thing you should do is to seek out expert independent financial advice. Chances are that it could open your eyes to a whole raft of unthought-of possibilities and may save (or make) you a fortune!
As always, we at Bridgewater Financial Services are here to provide expert and independent advice and to answer any questions you have regarding investing in stocks, shares, bonds or any other investment strategy you may be considering.
Please speak to an expert, even if it isn’t us, before you consider putting your money into the markets.