Share prices can go down as well as plummet
Stock markets around the world tumbled on Tuesday, falling from the record highs many had reached in the weeks before. To some commentators it was a correction. To others it presaged something far worse. But the truth is no-one knows. The immediate cause for the plunge in London, America and Europe was a 9% fall in the increasingly important Chinese stock market in Shanghai. All our economies depend more than ever on the world’s most populous country. But markets fluctuate – share prices in London fell more steeply than this on 17 May last year but soon recovered.
No-one predicted the price plunge at the start of the millennium. Then, prices having gone up like a rocket as the big date change approached, went down like a stick as the third millennium dawned. The downward path, not helped by the attack on America in September 2001, continued in London until 12 March 2003. By then the price of shares in our hundred biggest companies – the FTSE 100 – fell below half the peak it had reached with the fireworks on 31 December 1999. But since that nadir share prices in London have shown a pretty unbroken four years of growth – also unpredicted by the pundits. The index of ‘all shares’ – which is in fact the shares in 702 companies that are actively traded – went above its millennium record (which in fact it reached on 4 September 2000) earlier this year and after Tuesday’s fall was still within a whisker of it.
That’s good for recent investors. Some will have almost doubled their money. But many of those who invested in 1999 will not have seen any return on their investments at all. Those who put the maximum £7000 into the first ISAs in April 1999 and invested it in FTSE 100 shares will have seen their ISA struggling to reach that value again. In fact throughout 1999 FTSE 100 share prices were much the same as they are now. So eight years on, no growth.
That is why shares are for the long-term. For the past century money put into shares over periods of 20 years or more has done better than in any other mainstream investment. But over shorter periods the returns can be less, or negative. And because shares investments are for the long term they have to be treated cautiously by people who are over 50. The older we get, the fewer periods of 20 years we have left. So as retirement approaches it is sensible to move money out of shares, crystallising both gains and losses, and into investments where the return is modest but more certain. The professionals call it lifestyling.
Meanwhile we should be cautious at reading too much into one day’s plunge on the stock markets of the world. They are, after all, markets.
Go back to Paul Lewis front page