STOCK MARKET storms have battered many people’s pensions and Isas, with the FTSE 100 suffering its most volatile start to a year in more than two decades.
There have been no fewer than 24 days in 2016 when the blue-chip index has gone up or down by more than 1% — including a dozen gut-churning 2% swings.
We haven’t had a bumpy ride as bad as this since 1995, according to Russ Mould, a director of the self-invested personal pension specialist AJ Bell. Nor are the omens good. He told me: “Markets generally do best during periods of calm and less well when share prices are whipsawing around.”
Whatever the future holds, the volatility is frightening now for anyone who wants to hang on to their hard-earned cash. But it can also create opportunities for medium to long-term investors, especially those with regular saving schemes.
If you invest a fixed sum at fixed intervals over any period in which share prices fluctuate, you will benefit from “pound-cost averaging”. That’s City jargon for the fact that your fixed sum will buy more shares when prices are low and fewer when prices are high.
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If this sounds academic, consider the example of triplets who, regular readers may remember, began saving and investing 30 years ago. Starting in 1986, each set aside £1,000 a year on January 1. Then, at the start of each new decade — in 1990, 2000 and 2010 — they increased their annual savings by £1,000 to preserve the real value or purchasing power of what they set aside. Each invested in the broadest measure of the London market, the FTSE All-Share — that is, the FTSE 100, the FTSE 250 and the FTSE SmallCap index.
But they did so quite differently. Bad Timing Bob only ever took his savings out of bank deposits and invested in shares just before prices peaked. Good Timing Gary only ever came out of cash and bought shares when prices bottomed. Meanwhile, Steady Eddie invested his money in shares every month, come rain or shine.
As a result of their savings habit, they each set aside a total of £82,000 over the three decades, before they reached retirement age last week. Then, with a little help from Fidelity International, which calculated total returns from the FTSE All-Share, the three brothers reviewed how their different saving and investment strategies had fared.
No surprise to see that Bad Timing Bob did worst of all. He invested £2,000 just before the market slumped on Black Monday — October 19, 1987. Then he saved up £22,000 in cash until the next time he bought shares — in December 1999, just before the dotcom bubble burst.
His dreadful timing meant he stayed in cash before investing £24,000 in the FTSE All-Share just as the credit crisis began in October 2007, and then dived in again with another £30,000 when the market peaked in April last year. After all that, it must have been a relief to reach retirement with £4,000 in cash and a total fund value of just under £121,000, including reinvested dividend income.
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Nor is it amazing that Good Timing Gary did much better by investing only when markets hit their low points, so that he finished with a fund of more than £191,000.
Now here’s the surprise — Steady Eddie beat them both. His final fund value was nearly £234,000 by last Wednesday. The explanation is that his money never sat idle, earning next to nothing on deposit, and he always gained from pound-cost averaging. So even if you think you have a crystal ball, like Good Timing Gary, it makes sense to consider following Steady Eddie’s disciplined approach to long-term investment.
Tom Stevenson, investment director at Fidelity International, pointed out: “Drip- feeding your savings into the market month after month also means you gain from compounding [or income from income and gains from gains] for the maximum available time.
“Over long periods, stock markets have tended to rise. So, putting your money to work in the market and keeping it there has generated better returns than most ‘market timers’.”
Reasons to be cheerful about medium to long-term returns were set out last week in new research. The Barclays Equity Gilt Study 2016 analysed the five-yearly performance of deposits, bonds and shares since 1899 (yes, really). This shows how shares reflecting the broad composition of the London stock market delivered higher returns than deposits or bonds in nearly 75% of all those five-year periods.
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But which share-based regular savings scheme should you choose? For low-cost, diversified exposure to global economic growth, I would favour the fund in which my son, Joe, has been investing each month for several years — Foreign & Colonial (F&C) Investment Trust. Like Witan, another global fund with a long record of good returns, and the JP Morgan range of investment trusts, the minimum investment starts at £50 a month.
None charges any initial administration fee for its saving scheme, although F&C and Witan impose annual fixed costs of £40 and £30 respectively.
Switching between funds is free at F&C and JP Morgan but Witan charges a fixed fee of £15 and each trust imposes different annual management fees based on fund value.
There is no minimum investment period, so you can stop saving whenever you like.
Before doing so, though, beware the baleful example of Bad Timing Bob. The sad fact is that most investors are more like him than Good Timing Gary or Steady Eddie.
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Verily, bank’s Africa sale may be a biblical error
NO ONE rings a bell at the bottom of the market but I suspect that Barclays’ decision last week to sell its African business might mark the low point for global emerging economies.
Six years into the Biblical “seven years of famine” for the global economy seems a strange time to dump one of the biggest banks on the African continent after Barclays has traded there for nearly a century.
Perhaps Jes Staley, who became chief executive three months ago, is keener to “kitchen sink” the bad news than maximise long-term shareholder value.
Certainly the market was not impressed, marking Barclays shares down 10% on the news to 155p. I am glad I got out at 262p in May 2014, as reported here at the time when I wrote that I had “growing unease about our high street banks”.
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Unlike Bad Timing Bob, I do not try to time the market, but I do change my mind when the facts change, such as the bad news emanating from Barclays two years ago.
Perhaps I am biased because of a long-term enthusiasm for emerging markets. I must admit these have been the biggest short-term mistake I have made since setting up my “for ever” fund 2½ years ago. But I continue to hope I will live long enough to enjoy their recovery, and believe anyone selling now should never have bought into these highly cyclical sectors.
There is another reason I have a soft spot for unloved emerging markets in general — and Barclays’ African operations in particular. One of the first real characters I met in the City, when I went to work there in 1986, was Justin Urquhart Stewart.
Over a long lunch at Rules restaurant in Covent Garden, he regaled me with tales of his time working for Barclays in Africa. These included the day that Urquhart Stewart — now a director at Seven Investment Management, the wealth manager — jumped a checkpoint in Uganda and was shot with a rifle for his pains. “As I lay there with blood pumping out, it was like having warm tea poured over one,” he recalled.
Who says banking has to be boring?
ian.cowie@sunday-times.co.uk or follow him @iancowie
For a full disclosure of Ian Cowie’s shares, go to thesundaytimes.co.uk/cowieholdings