Index Trackers when interest rates are low

happywarmgun

My modest portfolio has taken a battering over the last 18 months (mainly due to what was 10k of HBOS shares now being worth about 200 quid). I've finally decided to pull my finger out and get back on top. Now, I don't think you need to be nostradamus to predict that we're in for a few rough years of likely sustained low rates of interest and very hesitant consumer demand. This got me thinking about Japan through the 90s which lived through similar circumstances (albeit at least boyed with global demand holding its exports up).

And I found this graph:

http://www.chartsrus.com/chart.php?image=http://www.sharelynx.com/chartstemp/free/chartind1CRU.php?ticker=^N225

It's astonishing. Can you imagine going to see a financial advisor in Tokyo in say 1982 and getting the "stock market is ALWAYS the best investment over the very long term" speech. And then the "Tracker funds, keep out the money manager commision and you get a return consistant with the market in the long term" speech. And then signing up. And then 29 years later be staring at a loss. In fact if you had jumped on board and held for any year at all since 1982 you would still be looking at a real loss, that's before you factor in inflation or opportunity cost of modest % returns in a savings account.

Now if you try to plot where the UK is on our similar journey we are probably at the equivalent dip in that graph circa mid 1990 - then factor in that we don't have the luxury of much global demand for our exports (what with them mainly being financial services!) - then maybe I might not by at FTSE Tracker after all....

Any thoughts?

LesU

happywarmgun wrote: »

My modest portfolio has taken a battering over the last 18 months (mainly due to what was 10k of HBOS shares now being worth about 200 quid). I've finally decided to pull my finger out and get back on top. Now, I don't think you need to be nostradamus to predict that we're in for a few rough years of likely sustained low rates of interest and very hesitant consumer demand. This got me thinking about Japan through the 90s which lived through similar circumstances (albeit at least boyed with global demand holding its exports up).

And I found this graph:

http://www.chartsrus.com/chart.php?image=http://www.sharelynx.com/chartstemp/free/chartind1CRU.php?ticker=^N225

It's astonishing. Can you imagine going to see a financial advisor in Tokyo in say 1982 and getting the "stock market is ALWAYS the best investment over the very long term" speech. And then the "Tracker funds, keep out the money manager commision and you get a return consistant with the market in the long term" speech. And then signing up. And then 29 years later be staring at a loss. In fact if you had jumped on board and held for any year at all since 1982 you would still be looking at a real loss, that's before you factor in inflation or opportunity cost of modest % returns in a savings account.

Now if you try to plot where the UK is on our similar journey we are probably at the equivalent dip in that graph circa mid 1990 - then factor in that we don't have the luxury of much global demand for our exports (what with them mainly being financial services!) - then maybe I might not by at FTSE Tracker after all....

Any thoughts?

We're probably closer to the Japanese experience this time round because we are running out of oil. At least in the 90's we had that to fall back on.
I suppose if you liken Japanese manufacturing and British financial services as the power houses of each country you get an equivalence of a downturn in wealth generation.

gozomark

if what you say happens, you shouldn't invest full stop, just save - whether its tracker or actively managed. Interest rates will only stay low if inflation stays low - real rates are actually not that low

dunstonh

Can you imagine going to see a financial advisor in Tokyo in say 1982 and getting the "stock market is ALWAYS the best investment over the very long term" speech.

Investing on a regular basis in Japan would have been fine. However, 100% investing into one sector is always full of problems. For example, UK stockmarket is down but Japanese funds are up 40-50% in the same period.

then maybe I might not by at FTSE Tracker after all....

100% into that would never be a good idea unless you are talking about a tiny amount.

gozomark

dunstonh wrote: »

Investing on a regular basis in Japan would have been fine. However, 100% investing into one sector is always full of problems. For example, UK stockmarket is down but Japanese funds are up 40-50% in the same period.
[\quote]

not to an investor based in Japan, which is the OPs point I believe - the Nikkei is within spitting distance of a multi decade low, and 80% from its high :eek:

happywarmgun

dunstonh wrote: »

Investing on a regular basis in Japan would have been fine.

No it wouldn't! Look at the graph. Had you have started a 10 pound a month fund in 1982 and stuck with it through all the ups and downs for the last 27 years on the basis of the well worn logic that drip feed investment allows you to 'average down' as well as up - the reality is you would still be spectacularly down on your investment 27 years later.

Remember - an index is a diversified basket across every sector in a whole economy. There are lessons from the Japan experience that apply to those thinking of investing in the UK at the moment that turn conventional stockmarket 'sales' wisdom on its head.

lukekelly_2

An index is not a diversified basket and holding one does not give you a diversified portfolio.

happywarmgun

lukekelly wrote: »

An index is not a diversified basket and holding one does not give you a diversified portfolio.

Honest Question (not a smart alec one): Which is the more diversified portfolio?

PORTFOLIO A
500 pounds in Glaxo shares
500 pounds in Cadbury Shares
500 Pounds in Rio Tinto Shares
500 Pounds in Cable and Wireless Shares
500 Pounsd in Tesco Shares

PORTFOLIO B:

2500 pounds in a FTSE 100 Index tracker

lukekelly_2

Neither represents a diversified portfolio.

TDS_2

Agreed. Try looking at FTSE All Share if you want more diversity.

Or better still, try several (5-10) trackers from different regions.

gozomark

B is more diversified