e-mail Paul Lewis on paul@paullewis.co.uk
We could be on the brink of something that has not happened for forty years – three consecutive years when the value of shares in UK companies has gone down instead of up. It last happened from 1960 to 1962, just after Harold Macmillan won the 1959 Election with the slogan ‘You’ve Never Had It So Good’. Despite what Gordon Brown tells us, boom and bust is here again.
The index of shares in our biggest hundred companies – the widely quoted FTSE 100 – fell by 10% in 2000, by another 16% in 2001 and, in the middle of July, it is currently 11% down in 2002. That means the value of shares has fallen by around a third in just over two and a half years. We cannot blame the terrorist attacks in the United States nor the fraud at the top of some large American corporations. Shares were falling long before that. And many experts say they still have further to go. Of course, they could be wrong – just as they were not that long ago when they were predicting each year that the market would rise.
We all know that the value of shares can fall as well as rise. But throughout the nineties we had got used to rises being bigger than falls. And following them fairly swiftly. Over the same period a huge financial services industry grew up on the expectation that the value of shares rises. Not just in the long-term. But in the fairly short-term too.
As a result many of us forgot the first rule of investment – diversify, spread your risk, don’t put all your nest-egg into one basket. Sales people have used that adage to sell us a variety of stock market investments – Extra Income, Dynamic Growth, Emerging Markets, Special Situations, Smaller Companies, Blue Chip. A lot of different names. But all invested in shares. Diversity has to mean more than that. Of course, it still means putting some money into the stock market. Otherwise you are closing off one option. But it also means putting significant amounts of money into other places – Government bonds, guaranteed income bonds, good savings accounts. And it means lowering our unreal expectations. Inflation is around 1%. So if we can earn 4% safely we are making money. Anything else is greed. And on the markets, greed is always followed by fear.
Autumn 2002
e-mail Paul Lewis on paul@paullewis.co.uk