Friday, 20 February 2009

Some food for thought on Investing

What makes it the 'lost decade'? A 1.05% return
(Article taken from Observer - 15 Feb 2009)

"Barclays Capital is calling the last 10 years "the lost decade" for equity investors. Its latest Equity-Gilt Study, which analyses investment returns over more than a century, shows that shares produced a return of just 1.05% between 1998 and 2008. Putting that into real money, £100 invested in the stockmarket at the start of the decade would have grown to just £111, even taking account of dividends - a performance well below gilts, corporate bonds and cash. That is the second-worst performance of any 10-year period in the last 110 years - the wooden spoon goes to 1964 and 1974, which produced just 1.02% a year.

So much for the argument that equities are the best place to put your money for the long term. Most people define five years as long-term, so 10 years should surely give shares long enough to prove their mettle. Tim Bond, head of global asset allocation at BarCap, and one of the authors of the study, blames the dismal performance on what he calls the "extreme overvaluation" of the stockmarket back in 1998.

"Although the growth in corporate profits has been robust over the period, investors were paying a very high premium to access these profits at the start of the decade. This has hampered, not to say eradicated, positive returns."

The Equity Gilt Study looks at the market as a whole: retail investors pay fund managers fees to do better than that. Alas, however, that does not always work. Ten-year performance charts for UK funds, prepared for the Observer by Tim Cockerill, head of research at Rowan, shows that some fund managers have done dramatically better than the market, and some substantially worse. In UK Equity Income, for example, Neil Woodford's Invesco Perpetual Income Fund produced a return of 133% over the decade to 9 February, and his High Income Fund was not far behind: at the other end of the scale, New Star UK Strategic Income lost 70% of its value."

1% return for 10 years of investment - gulp. That's terrifying.