Long term savings? Gold?

GeorgeHowell

All these various attempts to shore up the reputation of equities as the place to be in the longer term, whether the posters have axes to grind or not, are based on various premises. The include the assumption that someone picks fund winner/s that do better than the market as a whole, and or that the in/out timing and/or pattern of drip-fed investments proves favourable.

All of that is perfectly possible given market intelligence and a degree of luck. But the average punter may not be well provided with either. The fact remains that someone who invested in 1999 in equity investments which produced capital returns more or less in line with the FTSE100, and average dividends, will not be substantially better off, if at all, than if they had invested sensibly in cash term accounts over the same period.

It is possible to construct all sorts of scenarios by which it would have been possible to do much better than cash, and no doubt some people have. But does the average Joe/Jane who does not want to spend their time studying the financial pages, or even reading forums like this, and invests out of necessity, not as a hobby, want to take risks with their capital with no guaranteed higher returns resulting ?

Derivative

GeorgeHowell wrote: »

All of that is perfectly possible given market intelligence and a degree of luck. But the average punter may not be well provided with either. The fact remains that someone who invested in 1999 in equity investments which produced capital returns more or less in line with the FTSE100, and average dividends, will not be substantially better off, if at all, than if they had invested sensibly in cash term accounts over the same period.

It is possible to construct all sorts of scenarios by which it would have been possible to do much better than cash, and no doubt some people have. But does the average Joe/Jane who does not want to spend their time studying the financial pages, or even reading forums like this, and invests out of necessity, not as a hobby, want to take risks with their capital with no guaranteed higher returns resulting ?

You're unfairly tipping the scales against equities by choosing (one of) the worst possible investments, while choosing the best possible cash term account though. Why must they "invest sensibly" in cash, whereas chucking the whole horse into one index is fine?

The average Joe/Jane didn't sell their house to buy equities in 1999. Neither do the average Joe/Jane go for the top savings accounts - there are enough <1% rates out there.

Equities aren't suitable for all, but I believe it's grossly unfair to select one of the worst times to get in use that as an argument to detract from the sector. I could just as easily say that an investor in 2003 would now be in the money, but it's fairly unlikely that many people plunged 100% of their savings in then either.

The include the assumption that someone picks fund winner/s that do better than the market as a whole, and or that the in/out timing and/or pattern of drip-fed investments proves favourable.

On the record, I don't believe it's possible for most investors to consistently pick winners. Neither do I think market timing is viable without a healthy stroke of luck.

Statistically it simply does not make sense to take the 1999 peak, ignore how anyone who invested in 1997, 1998, 2000, 2001, or any of the other years has performed, and state that equities might now be a losing bet. Far more study is required.

Ark_Welder

GeorgeHowell wrote: »

All these various attempts to shore up the reputation of equities as the place to be in the longer term, whether the posters have axes to grind or not, are based on various premises....

...It is possible to construct all sorts of scenarios by which it would have been possible to do much better than cash, and no doubt some people have. But does the average Joe/Jane who does not want to spend their time studying the financial pages, or even reading forums like this, and invests out of necessity, not as a hobby, want to take risks with their capital with no guaranteed higher returns resulting ?

A single asset type will not perform better than all others over all periods of time. Although there are data that show that equities have done well over a hundred years or so, that is of no use to me unless I believe that I will continue to live for that amount of time. But whilst cash might have outperformed (some) equities over the last 10 or 12 years, that does not mean that it will definately continue to do so over the next 10 to 12 years: historical performance is not a reliable guide to future performance.

I choose to take an interest in my investments, and act accordingly. But for anyone that lacks either the time or the inclination to do so then they may be better off with just cash investments - if for no other reason than they will not get worried or upset when something unexpected happens to their capital.

However, there are still risks with holding cash: inflation and interest rates. Whilst holding ILSCs might protect against inflation, it could result in underperforming against fixed-rate accounts once interest rates start to rise - and if inflation is low.

But once again, how an individual chooses to invest should be determined by what makes them comfortable - and not simply because someone esle says ar does something different to them.

GeorgeHowell

Some sensible and valid points made in those last two posts, and of course I recognise that it's not all black and white.

I am however inclined to debunk the assertion commonly made by the fund management industry that shares will always outperform anything else over a long enough period. For a start this ignores the caveat that past performance is not necessarily an indicator of future trends. Secondly they don't really define what the 'long period' is. Thirdly they have been known to cherry pick the data that they show to support this assertion.

On the assumption that 12 years is a pretty long period, and that, right or wrong, bubbles do tend to attract people into markets, and that 1999 cannot be described as 'random' because it was the all time peak year for the FTSE100, then the old selling point for equities really does not hold up any more in the way that it used to.

The fund management industry is probably a bit desperate, because in this recessionary period, with share prices depressed, and no other forms of fund investment particularly attractive I suspect that they are not finding it easy to attract business, to put it mildly. But they really ought to start getting a bit more imaiginative and realistic about how they market themselves. Their 'golden paradigm' regarding the competitive advantage of equities really doesn't hold up any more, and nobody knows whether or not it will regain that position any time soon.

koru

GeorgeHowell wrote: »

I am however inclined to debunk the assertion commonly made by the fund management industry that shares will always outperform anything else over a long enough period.

You are certainly right that shares will not ALWAYS outperform, even over a long time period. But they do have quite strong odds of outperforming, at least based on very long-term analysis of the figures. As far as I know, the most comprehensive long-term analysis is carried out by Barclays and their most recent study can be found a number of places including here:
http://www.aspenwealthmanagement.co.uk/Content/uploads/Barclays_Equity_Gilt_study_2011.pdf

Have a look at the figures on page 94. They show that if you look at ten-year investment periods since 1899, investing in equities would have outperformed cash in 90% of the 10 year periods and outperformed gilts in 79% of those periods. So, yes, equities will not always outperform, even over relatively long time periods, but they are very likely to. If you invest in gilts with the intention of holding them for 10 years, history suggests that there is a 79% likelihood that you would have got better returns if you invested in equities.

I don't have the relevant figures, but in view of the fact that gilts are currently at a historically very high level and equities are at historically very low level (relative to the income generated), I think the probability that equities will outperform over the next 10 years is considerably higher than 79%.

GeorgeHowell

koru wrote: »

You are certainly right that shares will not ALWAYS outperform, even over a long time period. But they do have quite strong odds of outperforming, at least based on very long-term analysis of the figures. As far as I know, the most comprehensive long-term analysis is carried out by Barclays and their most recent study can be found a number of places including here:
http://www.aspenwealthmanagement.co.uk/Content/uploads/Barclays_Equity_Gilt_study_2011.pdf

Have a look at the figures on page 94. They show that if you look at ten-year investment periods since 1899, investing in equities would have outperformed cash in 90% of the 10 year periods and outperformed gilts in 79% of those periods. So, yes, equities will not always outperform, even over relatively long time periods, but they are very likely to. If you invest in gilts with the intention of holding them for 10 years, history suggests that there is a 79% likelihood that you would have got better returns if you invested in equities.

I don't have the relevant figures, but in view of the fact that gilts are currently at a historically very high level and equities are at historically very low level (relative to the income generated), I think the probability that equities will outperform over the next 10 years is considerably higher than 79%.

Fair enough. But probabilities imply gambles, and not everybody wants to take them.

koru

Any investment (including stuffing your money under the mattress) is a gamble. There is no investment that is guaranteed always to give the best performance. You can choose the one with a 90% chance of outperformance or the one with a 10% chance.

Choosing to put your money in fixed-rate savings accounts might not seem like a gamble, because you know in advance what rate of interest you are going to get, but this is a strategy which, 9 times out of 10, will deliver a lower return than if you had invested in equities. Therefore, in choosing to go for fixed-rate savings you are taking a gamble that the coming 10 year period will be one of those rare periods when savings outperform equities. The only difference is that it is a gamble with very poor odds.

GeorgeHowell

koru wrote: »

Any investment (including stuffing your money under the mattress) is a gamble. There is no investment that is guaranteed always to give the best performance. You can choose the one with a 90% chance of outperformance or the one with a 10% chance.

Choosing to put your money in fixed-rate savings accounts might not seem like a gamble, because you know in advance what rate of interest you are going to get, but this is a strategy which, 9 times out of 10, will deliver a lower return than if you had invested in equities. Therefore, in choosing to go for fixed-rate savings you are taking a gamble that the coming 10 year period will be one of those rare periods when savings outperform equities. The only difference is that it is a gamble with very poor odds.

Not everyone is seeking the maximum return, with hindsight. For many people the security of their nominal capital is the #1 consideration. They will gladly sacrifice a 90% chance (based on history) of a somewhat higher return in exchange for the 100% security of their capital in nominal terms. In terms of overall utility the peace of mind and the relative lack of stress in the downturns outweighs any monetary disadvantage that may arise, with hindsight.

In my view the way that more capital risky investments then cash are marketed often fails to provide a fair and true view, especially to relatively naive investors. In addition, as we know there have been examples where capital-risky products have been sold to the unwary unsuitably and/or without such risks being sufficiently flagged up. If the marketing described the risks and probabilities in the intelligent and reasonable way they are described on much of this thread it would be a different matter, and caveat emptor could fairly apply.

No doubt the counter-argument will be to say, "Come on, grow up and get real, this is marketing we are talking about. It's always going to paint a rosy picture and try to ignore the negatives." That's true, but most marketing does not involve decisions potentially about people's whole life savings and future financial security.

atush

Well I will continue to hold cash, property and equities. And will continue to save in cahs and equties monthly. Cahs for short term spenind (uni fees and cars, holidays, home) and equities. Just because in one index (not all indecies) underperformed cash deposits for a single 12 yr period means nothing to me. Esp as I myself only started investing around the late 90's. And NEVER invested in just the ftse 100 then and don't do now. And my investments (incl building a house) have on the whole done VERY much better than cash. And I only started learning then, using books, the Motley Fool and other websites.

So go on george, hide your money under your mattress (where is risks being stolen or burnt up in a house fire) or in cahs deposits where is risks being beaten by inflation. I don't really care, i'll just keep on doing what I have been doing this last 15-20 years. Spreading my eggs around in different baskets and looking intelligently for new opportunities in markets.

atush

DiggerUK wrote: »

I would have no problems if you put all your spare loot in to gold, but then again I'm regarded as quite mad by one or two around here.

What is your understanding of inflation. If it is 'just prices rising' then you are only considering half the picture. Inflation in it's traditional economic translation, is about the real value of the cash in your pocket. I'm taking it as read that you understand the concept of too much 'printy printy' devaluing what you have in your pocket.

Gold will not make you rich, it just preserves the real value of what you have at present.

Consider why your 3K 10 years ago, would be 14K now.
Do you think it would be 14K because people are mad, or is it because the real value of paper money has crashed.

Buy a few sovereigns and learn all you can along the way. They can never become worthless.
..._

I am surprised how you can type that with a straight face, gvien how much gold has fallen in the last 3 months lol.

I actually did buy gold more than 10 years ago and it was a great investment. But doesn't mena I would be telling everyone to pile in now