DIY Investor Magazine
| Oct 2017
38
MARKETS ARE HIGH; THE MEDIA AND SOME INVESTORS FEAR A FALL
– ARE THEY RIGHT?
The time to repair the roof is when the sun is shining’
John F. Kennedy – State of the Union Address 11
January 1962
There is lots of comment at present about how
far the markets have risen and if we are heading
for a correction, writes
David A Norman of TCF
Investments.
The chart below shows the ten years returns from the IA
sector averages UK All Companies and 20-60% Shares
(what might be called ‘balanced’). These averages show
75% and 50% total returns over ten years including the
2008/09 wobbles. The media and investors seem to
be pessimists – nervous investors may now be seeking
guidance about reducing risk, so what does the data
show?
Stock markets don’t rise all the time but they do gain
most of the time and it generally pays to take the
optimistic view, says analysis research from Proinsias
O’Mahony. “Stock markets do suffer frequent declines,
but the long-term trend has always been an upward
one. In the United States, equities have historically
gained in roughly three out of every four years, and
there has never been a 20-year period where stocks lost
money.
In the UK, stocks have beaten cash in 68% of two-year
periods and 75% of five-year periods, according to
Barclays’ annual Equity Gilt Study. Over 10 years, UK
stocks beat cash 91% of the time; over 18 years, the
beat rate rises to 99%. It’s a similar story with bonds,
with stocks outperforming the vast majority of the time.
Things aren’t always rosy, and sceptics can point to
disasters like Japan, where stocks have halved in value
since 1989’s infamous peak. It’s an unarguable fact,
however, that stock markets typically rise over time’.
EGGS IN BASKETS
The figure below shows the returns over the last ten
discrete years from 12 IA sectors and an ‘equally
weighted’ portfolio of the 12. It clearly shows the benefit
of diversifying across a range of asset classes in
reducing downside risk.
NEGATIVITY BIAS
O’Mahony also notes that journalists have always
tended to be more negative about market declines
than they are positive about market gains, according
to Prof Diego Garcia. His study The Kinks of Financial
Journalism examined market coverage in the New York
Times and the Wall Street Journal over the last century,
and found it had ‘barely changed’ over that time period,
with ‘virtually all’ authors ‘emphasising negative returns,
ignoring large positive market moves’.
Earlier this year, Financial Times columnist John
Authers, one of the most thoughtful commentators in
the investment world, admitted his own writing is likely
to be similarly biased towards the negative. Firstly,
journalists view themselves as sceptical watchdogs,
‘the public’s first line of defence against people in the
industry trying to oversell them things’. Secondly, ‘we
are far more scared of encouraging readers to buy and
ushering them into a loss, than we are of urging them to
be cautious, and leading them to miss out on a gain’.
A journalist who tells readers to buy an Enron-like stock
would be vilified, said Authers, but no one complains if
you tell readers to avoid a stock which goes on to soar
in price. Of course, financial journalists are not the only
ones to be guilty of a negativity bias.
