I often hear that the stock market is “too risky.” That individual investors don’t stand a chance against the inside traders and the people in the know.
Dictionary.com defines risk as ‘a situation involving exposure to danger’. So is there danger in holding shares or not holding them? RPI today is 3.3%. Instant access savings accounts are offering less than 2% before tax, so inflation is wiping out all the return. Now to me, that is an exposure to risk.
Since 1955 the average intra-year decline in the FTSE all share from peak to trough was about -12%. It did this in 15 years out of the 58 years analysed. Some years it was much worse. Sometimes you had to sit through market declines of up to 55.84%. (December 1973 to November 1974).
There was a decline of at least 15% on an average of once every three years. And there was a “bear market” – a decline of a minimum of 20% (and in reality an average closer to 30%) – about every five years or so. That appears pretty risky.
But, lets then look at the long term buy and hold investor who sat through all the crisis and discussions of the end of the world.
FTSE All-Share Index
1-Year Total Return (%) 16.30
3-Year Annualized Return (%) 11.05
5-Year Annualized Return (%) 5.68
10-Year Annualized Return (%) 10.47
20-Year Annualized Return (%) 8.08
Annualized Return (%) 11.89
Lowest 1-Year Return (%) -55.84
Highest 1-Year Return (%) 151.41
Lowest 3-Year Annualized -26.21
Highest 3-Year Annualized 56.52
The investor who sat and was patient, didn’t listen to all the “noise” and had the guidance of a professional got rewards for the “risk” he was taking. Looking at it this way, isn’t the building society investor holding the long term risk?
As always, here at MFP we design bespoke portfolios for our clients and it would be extremely rare (read: it hasn’t happened yet!) that any client would be invested only in the FTSE All Share. We also haven’t taken into account taxes and charges for these statistics. Please do not take this as a recommendation to invest! We design investment portfolios to meet individuals’ financial plans, and advice is always necessary. As you can see investments can go up and down and if you cash in at the wrong time you can lose vast amounts of money. But if you stick to the long game, historically earnings and compounded dividends increased.