Investors: Ignore the Doom and Gloom

OPINION: Valuations may no longer be as attractive as they were – but if you had listened to the negative press in 2009, you would have missed out on incredible gains

Emma Wall 5 September, 2014 | 4:31PM
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My friends often call me Positive Pamela. I am a glass-half-full optimist, a morning person and an evening person. This is an anomaly among financial journalists, who like to predict doom and gloom – warning investors that market rises are too good to be true and the only way from here is down.

Against market expectations US debt rallied this year

I am sure I have also been guilty of scaremongering in the past, but more often than not these doomsday apocalypses do not come to pass. If you had sold out of fixed income when the bond bubble first threatened to burst more than two years ago you would have missed out on significant gains. Against market expectations – and hedge funds’ bets – US government debt rallied further early this year.

There is no doubt that fixed income has benefitted from a significant rise in value and is no longer the most attractive asset class but it does serve as a reminder that investors would be foolish to disregard an entire asset class based on negative sentiment.

Similarly the naysayers have been talking down developed market equities since the depths of the crisis – as those stocks climbed to pre-recession highs. Even now, after an impressive five year rally the pessimists are warding off investors.

Valuations may no longer be as attractive as they were – but if you had listened to the Negative Nancys in 2009, you would have missed out on incredible gains. The S&P 500 has risen from 683 points in March 2009 to nearly 2,000 points today. In the same timeframe the FTSE 100 has gone from 3,530 to 6,850.

And there may well be more gains to come. Self-proclaimed realist Tom Becket, chief investment officer at Psigma, recently conceded that the next few years could be a golden age for equity investing.

“There is a wide gap between bond yields and equity risk premia earnings yield over the risk free rate/ treasury yield. Nowhere is this more obvious than in Europe, where German bund yields have now collapsed to below 1% on the 10 year,” he said.

“This yield gap in favour of equities is a worldwide phenomenon. Corporate free cash flow yields and dividend income is extremely attractive in a world where the risk free rate is practically zero. A common objection as to why equities are so attractive is because nothing else is.”

It is worth remembering that the bond market rally lasted nearly two decades – compared to that five years of equities gains seems paltry. After the US had such an impressive gain last year, many were quick to call the peak in December – but it has climbed around 200 points since then.

August – traditionally a lacklustre month for the FTSE 100, was very positive for the index. If you had sold in May and gone away you would have missed out on sizable gains.

Scaremongering can damage your portfolio – not only because you can miss out on gains, but you can also unnecessarily crystallise losses. Taking a long-term patient view on market fluctuations can lead to a bigger and better pensions and ISAs.

Morningstar's director of personal finance Christine Benz says the best tip you’ll ever encounter as an investor is to tune out the market noise.

“The fact is, no successful investment strategy revolves around trying to guess the market's direction, so I wish everyone would just stop acting like that's a productive activity,” said Benz.

“I know that I can't convince the legions of pundits and brokers of the merits of not producing the noise. After all, their livelihoods depend on getting you to trade and buy stuff based on the daily news flow. But if I can convince private investors to tune it out, I'll be satisfied.”

The trick is to be selective about your new investments. Yes not all equities are attractively priced, but if you invest in undervalued good quality stocks, highly rated managers and well run passive funds you will experience greater gains than the pessimists who sit on the side lines and moan.

Tune out the market noise - after all, you have to be in it to win it.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Wall  is former Senior International Editor for Morningstar