Tuesday 12 May 2009

'The risk of losing money in the short-term is high'

'The risk of losing money in the short-term is high'

The stock market, that maddening babble of millions of differing points of view, has done it again.

By Ian Cowie
Last Updated: 1:07PM BST 11 May 2009

Just when many people decided never to have anything to do with shares, prices took off.

This is good news for millions of people hoping endowments will repay mortgages, pensions will fund retirement and unit or investment trusts will prosper. Even if it is also rather galling for anyone who shunned their individual savings account (Isa) or annual pension allowances last month.

So the index of Britain's biggest shares soared by 25pc in two months. When you consider how many "experts" have produced books on economic meltdown in recent weeks, you would need a heart of stone not to laugh.

Perhaps the market will be higher still by the time the more ponderous pessimists have published. Nor is the Footsie's progress being driven by obscure stocks which few people hold. Barclays Bank, for example, has seen its share price rise more than six-fold this year from 47p, when doom-mongers feared bankruptcy, to 291p this week.

Nobody knows if this will last but I draw comfort from the fact that so many experts remain bearish. The same people were bullish before the crash.

It is human nature to assume that the future will be like the immediate past. But, as the bar chart on this page demonstrates, a longer term view is more encouraging. M&G looked at 20 years' returns from the British and global stock markets, measuring hundreds of periods starting at the beginning of each month.

What comes through loud and clear is that the risk of losing money in the short term is high. Where shares were held for only one year, losses were suffered a quarter of the time. However, where holdings were extended to five years, the risk of loss fell to one in five.

Most reassuringly, where shares were held for a decade, losses were suffered less than 1 per cent of the time.
That illustrates what an extraordinarily dire decade we have lived through, since the FTSE peaked at 6,930 in December 1999.

It even suggests, dare I say it, that we may make further progress before that decade is complete. Most importantly, it illustrates that long-term investors are not taking the same risks as short-term speculators.

http://www.telegraph.co.uk/finance/personalfinance/comment/5305053/The-risk-of-losing-money-in-the-short-term-is-high.html

No comments: