The recent collapse of Silicon Valley Bank and the acquisition of Credit Suisse has left some prospective investors wondering if now is the best time to invest in the stock market. But for those looking to invest in the long term, near-term skittishness in the exchange needn’t necessarily serve as a deterrent. Prudent long-term investments can ride out hiccups and deliver strong returns because markets generally trend upward over time – as deVere CEO Nigel Green says: “It’s about time in the market, not timing the market.”
A high inflation rate means money sitting idly in the bank will depreciate over time. The latest inflation data by the Bank of England shows an inflation rate of 10.4%, over five times the bank’s 2% target, and more than double the base interest rate.
In stark contrast, the FTSE 100 has grown 122% over the past two decades, returning investors an average of 8.9% annually. The London-based exchange has seen off its fair share of turbulence – from the dotcom boom to the banking meltdown – to see growth over the long term. Last month the FTSE 100 beat off fears of recession to soar to an all-time high when it closed at almost 8000 points on February 8th.
Why Do Markets Trend Upwards?
Stock markets tend to trend upwards. While speculation can under or over-value particular stocks, the value of any given company is ultimately dictated by a company’s earnings.
The late Benjamin Graham, monikered the ‘father of investing’, once said: “In the short run, the market is a voting machine but in the long run it is a weighing machine”. His meaning was that near-term market fortunes can be influenced by speculation but in the long term money talks.
And stock market data stretching back almost a century shows that firms are making more and more money. Since 1928 the US stock market has delivered an average annual return of 9.8% and typically rises every six out of eight years.
Companies continue to post higher revenues and profits largely driven by the march of time which sees new innovations in technology and practice emerge to drive up value.
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While some investors opt to single out specific stocks to invest in, the upsides of opting into a mutual fund have seen them become an increasingly popular choice.
Mutual funds involve a number of investors buying stock together that they might otherwise not be able to afford. This fund is managed by a professional fund manager who looks after it on behalf of the investors. They aim to deliver growth while mitigating risk and riding out any potential turbulence in the market.
Investment into a range of firms works as a bulwark against any single stock crashing, a mechanism known as diversification. Robert Khan, a senior wealth manager at deVere, said: “It’s crucial to maintain a diverse portfolio when investing. Spreading your bets ensures that in the event an individual stock underperforms, the other stocks contained in the fund will insulate shareholders against the fallout.”
The fund manager will ensure the fund is sufficiently diverse, saving labour for the investor and ensuring an experienced professional is in place to handle the fund appropriately.
Many find the liquid nature of their holdings in mutual funds an attractive proposition. Though mutual funds aren’t traded on the stock market, investors can redeem their shares through a registered broker, making funds as liquid as a typical stock investment.
Is The Economy Going to Improve?
Though success in investing will ultimately be yielded by well-chosen long-term holdings, it remains prudent to take stock of the economic situation in the near to medium term.
The UK’s Office for Budget Responsibility published in March expects GDP to contract by 0.4% in the first quarter of 2023. The drop would leave British GDP fully 0.6% below its 2022 peak.
Flatlining output is expected in the second quarter before output recovers and rises in the third quarter – paving the way for the OBR’s projected growth rate of 2.5% by 2025.
The OBR has forecasted higher GDP and potential output owing to an increase in the labour supply because of measures contained in the Spring budget and high migration, in addition to falling energy prices.
Overall, the Treasury found analysts say UK GDP will drop by 0.2% this year, with inflation falling to 6.9% and government borrowing falling by two-thirds by 2027/2028.
In the USA forecasters are predicting a ‘soft landing’ for the American economy. Deloitte’s baseline analysis for 2023 predicts economic growth slowing throughout the year, but not shrinking – and thereby dodging recession.
Advisory firm Teneo expects to see a material softening of inflation. Wages are expected to rise in 2023 even in the case of a mild recession. They expect high-income households to be worse affected by economic headwinds, driving a fall in consumption as high earners turn to save instead.
What Is Cost Averaging?
Cost averaging, variously known as pound cost averaging or dollar cost averaging, is a way of buying more shares when they are cheaper, and less when the price rises. The term was coined by Benjamin Graham who defined the mechanism as so:
“The practitioner invests in common stocks the same number of dollars each month or each quarter. In this way, he buys more shares when the market is low than when it is high, and he is likely to end up with a satisfactory overall price for all his holdings.”
British insurer NFU Mutual defines cost averaging as:
“A complex-sounding name for a straightforward process. For example, if a company had a share price of £1, you would buy 50 shares with a £50 monthly investment. If the share price halved to 50p, you would pick up 100 shares that month. That means, if the share price recovers to £1, the value of your investment has grown, and you have more to show for your money.”
Dollar cost averaging is a way of investing over the long term – and enables investors to make a start with small amounts of money. While some analysis has shown cost averaging underperforms lump sum investing, it does have its benefits. As Forbes reports:
Diversification Pays Dividends
Maintaining a diverse portfolio over a long-term period is the best way to ride out uncertainties in the market. By banking on the historic and continued upward trajectory of stock market value and spreading bets across a range of holdings, shareholders can minimise risk while earning a strong return on their investment.
One of the best ways to achieve both these ends is by investing in a mutual fund. The professional management of a mutual fund sees investors’ money closely monitored and looked after while being spread across many stocks.
Attempting to dive into the market at the ‘right time’ is a risky proposition, particularly in the face of an uncertain economic outlook. Instead, by making a long-term commitment, shareholders can watch their investments grow steadily over an extended period – making these far-sighted investment decisions the most reliable.