I told you so: why shares beat bonds and deposits

I told you so: why shares beat bonds and deposits

By Ian Cowie Your Money
Last updated: November 5th, 2010

Perennial pessimism is the easiest way to simulate wisdom about stock markets – but it ain’t necessarily the way to make money. As the FTSE 100 hits a two-and-a-half-year high, this might be a good time to remind the smart Alecs that you have to be in it to win it.

Sulphurous cynicism is the usual response whenever anyone points out that shares yielding more than bonds or deposits might represent reasonable value – as you can see from the responses to my most recent blog on this theme. But, as regular readers will know, despite a dismal decade for the Footsie, I have long held the view that shares and share-based funds should make up the majority of any medium to long term investment strategy.

For example, here’s what I wrote in this space in August, 2009: “After all the worldly-wise men’s warnings of a double-dip recession, it should be no surprise to see the FTSE 100 soar by 40pc above its low-point this year.

“If anything, the continued consensus among most market observers that this remarkable rally has “gone too far, too fast” should boost our hopes the index will breach 5,000 soon.

“One reason all this may come as a surprise to many is that most TV coverage of the market is based on the principle that bad news is good news and good news is no news at all. “Bong! Billions wiped on shares!” Doesn’t sound familiar, does it?

“But the fact remains that investors in blue-chip shares have enjoyed the best summer in a quarter of a century. Some smaller companies shares and emerging markets did even better. That’s another fact you won’t hear from the doom and gloom crew.

“This should remind us that the reason shares provided higher returns than bonds or deposits over three quarters of all the five-year periods during the last century is that economies tend to grow over time and shareholders own the companies that create this wealth.

“So, medium- to long-term savers – like those of us saving toward paying off the mortgage or funding retirement – need not worry too much if share prices fall next month. That might be a problem for fund managers, who must answer to a board of directors every few weeks, and an opportunity for the rest of us.

“Finally, it is worth considering the personal anxiety of many professionals who are now “short of the market” or holding cash rather than shares. They can only afford to sit and watch prices rise for so long before they feel compelled to join the fun and keep their jobs.”

Shares are not as cheap as they were when I wrote those words but returns on bonds and deposits remain dismal. The agony of the worldly-wisemen and perennial pessimists sitting in cash or fixed interest, earning next to nothing, may only be just beginning.


http://blogs.telegraph.co.uk/finance/ianmcowie/100008501/i-told-you-so-why-shares-beat-bonds-and-deposits/