On a 10-year view, shares are a bad investment.
That UK share prices are officially in a bear market – 20 per cent below their recent peak - is belated recognition that British business is in trouble as well as the City’s financial firms.
The investment apologists concede we have gone beyond “technical correction” but still explain that equity ownership is a long-term process and that time will prove shares to be the best home for savings.
Wrong. Or at least we need to redefine how long is long-term. Bear markets come and go, but for the first time, share prices are lower now than a decade ago. If your pension had bought the FTSE 100 in mid-1998 – as it probably did - it would be showing an absolute loss even after 10 years.
In fact the loss would be worse than a straight comparison of the index figures: many companies in the FTSE 100 then have since been expelled because their share price falls expelled them from the index to be replaced by more successful companies.
And 1998 was by no means the peak of the Footsie. It rose more than 1000 points more before touching 6,930 at the end of 1999 when the dot.com bubble burst. With the index heading towards 5,000 at the time of writing, it will require a heroic increase in share prices – a bull market, in fact – for the index to show a 10-year positive return any time before 2010.
To lose money over a decade may be unusual but this is neither a blip nor a short-term phenomena. Finance directors as well as fund managers need seriously to rethink that value of equities. Shares have not only failed to keep pace with inflation they have failed to keep pace with themselves.
Yet if debt tried to become the new source of finance during the middle years of this decade, the credit crunch has shown it is not an viable alternative. It may turn out that the bear market of 2008 proves a low base that allows share prices over the next 10 years to show the sort of positive returns investors had in the last century – but let’s hear no more nonsense of how equities are always a good investment in the long run.
