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Investors – ignore the news headlines, make up your own mind

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Thursday April 26, 2012 at 9:00am

As an investor you could be excused for being somewhat confused by the fluctuations in the markets over recent years and the apparent mismatch between the depressing news headlines and the buoyancy of the FTSE100 for example.

The FTSE 100 index has risen from 5000 to nearly 6000 and back to 5750 in a matter of months. Back in September/October 2011 when the FTSE 100 was touching 5000 points some days, the news headlines certainly weren’t predicting this kind of improvement:

"I don’t think we’ve seen the lows for the year by any stretch. Things have to get much worse before they get better." Wall Street chief equity strategist (September 19, 2011)

"The world economy once again stands on a precipice." Journalist (September 23, 2011)

"I don’t see anything changing in the next two or three years." Investor (September 26, 2011)

"Unless politicians act more boldly, the world economy will keep heading towards a black hole."  Economist cover story (October 1, 2011) 

Around mid March 2012 the FTSE100 was just under 6000 points, a 1000 point increase from six months earlier. The news headlines from around that time still painted a pretty bleak picture:

"This is a business-as-usual overpriced market and you’ll get a zero return for seven years." Money manager (February 27, 2012)

Eurostat reports that Eurozone unemployment in January reached 10.7%, the highest in fifteen years. (March 2, 2012)

"The stock market has effectively doubled since the March ‘09 low, and we’re still in redemption territory for equity funds." Strategist (March 12, 2012)

"Expectations for earnings have been steadily scaled back this year, as the mood among companies has worsened." Journalist (March 19, 2012)

As I write this blog the FTSE 100 closed at 5745 (18th April 2012). If there is one thing we can be sure of it is news headlines do not drive equity prices. As you can see above, news is bad even as the markets climb 1000 points. Just to prove there was not a spell of good news between October and March here are some headlines as the markets rose:

"Petrol prices are at the highest point ever for a new year.” (January 6, 2012)

"Developed and developing-country growth rates could fall by as much or more than in 2008–09." World Bank (January 18, 2012)

"Eastman Kodak files for bankruptcy.” (January 18, 2012) 

"Global elite fears renewed downturn." Report from Davos World Economic Forum (January 25, 2012)      

So, it seems that markets are optimistic but nobody else is, certainly not the press. It is clear that predicting markets is a frustrating business. There is a saying that “stock markets climb a wall of worry”.

So what is an investor to do? There are so many factors affecting markets that no one individual can second guess all the events that will impact share prices. News travels so fast that all news is already factored in to the price. As demonstrated above the headline news was not the actual news that stock markets were factoring in.

So here are some of my tips for things you should consider when making investments:

  1. As you can’t second guess market movements you should remain invested and weather out the short term volatility. Over the long term the volatility is much less. 
  2. Remember that investing in shares is long term, 5 years minimum. If you don’t want to tie your money up for that amount of time invest in the building society and accept the real purchasing power of your money is going to fall over time. 
  3. Have a clear understanding of how a stock market works. Investing in stock markets carries more risk (as measured by volatility) than investing in the building society and hence the return it gives you is higher. Indeed why would anyone invest in equities if they did not believe they would obtain a higher return than say investing in government gilts. This can be proven by back testing a fully diversified portfolio of equities. Long run returns should be around 7 to 8% per annum.

If you would like a copy of the Investment Philosophy we use when advising clients on investment please give me a call.

Andy Parker
Chartered Financial Planner, Birmingham

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