Long term value of equity investment

chucknorris

What has held me back previously, is that every so often there are major corrections. I have started to come around though, thinking that what goes down will probably go back up again. But I still have some discomfort when you see that the ftse 100 isn't any higher than it was 15 years ago, whereas property historically has managed to recover corrections and increase above previous peaks and (at least me in my experience) seems to produce a higher income.


Am I missing something? Is the ftse 100 an exception and a bad example? Or is it a case of the last 15 years not being a particularly good example?

colsten

You are missing the dividend payments that wouldn't be reflected in the share prices or indeces.

kidmugsy

http://blogs.ft.com/andrew-smithers/2014/08/long-term-investing/

jimjames

chucknorris wrote: »

Am I missing something? Is the ftse 100 an exception and a bad example? Or is it a case of the last 15 years not being a particularly good example?

You wouldn't normally just hold one index but a more balanced portfolio which is up substantially.

Even the FTSE100 is over 60% up since 1999 despite the index value still being slightly below the level then. All that is due to dividends being reinvested. Dividend reinvestment can make up a big portion of the returns long term.

Other markets have done far better. Some Asian ones are up 5x over that same period so an overall portfolio return would be a mix of all those returns.

It's easy to compare from previous peak to now but very few people would have invested all their money at that time. Most would have invested over a period of time and by now be substantially up. The index went below 4000 on several occasions since 1999 and if you'd bought then you'd have nearly doubled your money plus had the dividends too.

Historically you had to put up with a lower level of dividends but with the aim of capital growth building the income level over time. The bizarre situation now is that you can get a far higher level of income holding a FTSE100 tracker at 3.5% than you can with a savings account so anyone after good income can benefit too.

chucknorris

jimjames wrote: »

You wouldn't normally just hold one index but a more balanced portfolio which is up substantially.

Even the FTSE100 is over 60% up since 1999 despite the index value still being slightly below the level then. All that is due to dividends being reinvested. Dividend reinvestment can make up a big portion of the returns long term.

Other markets have done far better. Some Asian ones are up 5x over that same period so an overall portfolio return would be a mix of all those returns.

It's easy to compare from previous peak to now but very few people would have invested all their money at that time. Most would have invested over a period of time and by now be substantially up. The index went below 4000 on several occasions since 1999 and if you'd bought then you'd have nearly doubled your money plus had the dividends too.

Historically you had to put up with a lower level of dividends but with the aim of capital growth building the income level over time. The bizarre situation now is that you can get a far higher level of income holding a FTSE100 tracker at 3.5% than you can with a savings account so anyone after good income can benefit too.

I'm still not convinced that it is as good as property, 60% over 15 years is only about a 3.2% return. I have dipped my toe in the water because of the dividend income exceeding savings rates, but I'm unsure about investing more, on the other hand I do think diversification is important (I mean away from property, as well as diversification within funds held). Interesting than some Asian funds are up fivefold.

chucknorris

colsten wrote: »

You are missing the dividend payments that wouldn't be reflected in the share prices or indeces.

I didn't miss them, I did say that the return is higher from property (i.e rent v dividend income).

chucknorris

kidmugsy wrote: »

http://blogs.ft.com/andrew-smithers/2014/08/long-term-investing/

Thanks, this bit was interesting:


History, therefore, suggests that substantial benefits can be obtained by not always being fully invested and reducing exposure to equities when markets become seriously overvalued.


I would feel more comfortable if I also held something else (bonds?) to invest more when markets crash, it is also interesting that he is suggesting dipping out of the market when it looks very high ('q managed'). I thought the accepted correct thing to do was to stay in the market, rather than time the market, I must admit I would feel far more comfortable with a 'get partly (or substantially) out' strategy when the market reaches a certain level. Because I would at least be giving myself a chance of having the best of both worlds.

Mirno

If you want to compare pretty much the best time for property vs the pretty much worst time for equities as your basis for investment decisions that's your call.

From http://www.ft.com/cms/s/2/f15d6f6a-c283-11df-956e-00144feab49a.html

Figures produced by Credit Suisse First Boston show the impact of long-term equity investment in the last century, from 1900 to 2000. “Using these figures, you can see that, since 1900, an investment in UK shares after dividends and after inflation has gone up 287 times,”.

So accounting for inflation over a 100 year period the FTSE 100 returned 5.3% on average per year. I don't know what the return on property would be during the same time period - or how to account for the effort involved in upkeep, voids, etc. either.

But that's the case for equities over a long enough time period to make a decent argument for owning them as at least part of a balanced portfolio.

Mirno

chucknorris

Mirno wrote: »

If you want to compare pretty much the best time for property vs the pretty much worst time for equities as your basis for investment decisions that's your call.

From http://www.ft.com/cms/s/2/f15d6f6a-c283-11df-956e-00144feab49a.html
So accounting for inflation over a 100 year period the FTSE 100 returned 5.3% on average per year. I don't know what the return on property would be during the same time period - or how to account for the effort involved in upkeep, voids, etc. either.

But that's the case for equities over a long enough time period to make a decent argument for owning them as at least part of a balanced portfolio.

Mirno

I don't think that article takes into account that property investment can be leveraged, this massively increases the returns, there is absolutely no way that we could have made the money that we have from property with funds. But that said now that we have made the money, we are looking for an easier life (property = hassle) and also reducing risk by investing/diversifying into shares, rather than more investment property, we already have a fair bit of equity in investment property, compared to about 28% scattered between DB pension, shares and cash. I suppose I am just experiencing difficulties in changing down gears, going from maximising profits to an easier but safer lifestyle.


I liked kidmugsy's article (linked above in his post), I like the idea of slowing moving out of shares when they get very high, creating the opportunity to buy back in again later. If they don't fall and kept going up, it wouldn't matter that much because I would have seen a fair bit growth by the time I had got out, that would be good enough for me.

jimjames

chucknorris wrote: »

I don't think that article takes into account that property investment can be leveraged, this massively increases the returns, there is absolutely no way that we could have made the money that we have from property with funds.

Well I think you probably could have made it if you had done the same leverage with fund/share investment that you have done with property.

One of my funds has gone from under £2 to £10 in the last 14 years. If I'd used 75% borrowed money to boost returns, that could have been a massive boost to a £100,000 investment.

IronWolf

You wouldn't want just to own FTSE100. Globally there are markets that have done and will do much better. Since 1990 the S&P 500 has returned just under 10% a year.

Emerging Market index has returned 14% per annum for the last decade - and that is with shares currently a bit depressed there.

Since 1995 the average UK house price has increased 5.2% per annum. Add on another 4% say for rent after taxes and maintenance and its lagged the S&P, Emerging markets as well as actually requiring active management.