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The importance of a long-term investment plan
11:32am Tuesday 3rd January 2012 in Business
It is over 30 years since Margaret Thatcher came to power as Prime Minister, and one of the lasting legacies of her premiership was to popularise the culture of share ownership among the British people.
Thatcher launched a privatisation policy involving the public utilities, with British Telecom the first to be floated in 1984.
Its sale did more than anything else to lay the basis for a share-owning popular capitalism in Britain. Two million people, 25% of whom had never been shareholders before, bought shares in the flotation.
The privatisation of British Gas followed; this time, four and a half million people invested in the shares and a new generation of equity investors was established.
In the same year as the BT floatation, the FTSE 100 Index - the most widely used UK stock market indicator - was launched, and a look at the Index’s highs and lows over the following three decades emphasises the importance of taking a long term view when it comes to successful investing in equity markets.
With the benefit of hindsight, the timing of its launch in July 1984 was not ideal, with the index falling to an all time low of 978.7 just a few months afterwards.
Since then, the index has provided a record of stock market undulations – including an all-time high of 6,930.2 at the end of 1999 as investors clamoured for all things technology in the soon-to-burst Technology/Media/Telecoms, or TMT, bubble.
Whilst the index hasn’t traded below its initial level of 1,000 since 1984, the impact of major global events has, unsurprisingly, heralded significant falls.
The 9/11 tragedy led to the index falling nearly 6% in one day and more recently the financial crisis of 2008, and near collapse of the global banking system, saw the index return its worse ever calendar year performance, losing almost one-third over the 12 month period.
A late-summer rally in 2010 saw the Index pick up significant momentum, buoyed by investors’ renewed willingness to adopt a greater attitude to risk and move away from traditionally less volatile assets such as bonds or cash-based investments.
However, that positivity was somewhat short-lived as the unfolding European sovereign debt crisis spooked investors and the demand for so-called risk assets saw billions wiped off the value of global stock markets.
The current macroeconomic headwinds reinforce the point that no one can ever say with any certainty what the markets will do in the short term. What the FTSE 100 Index does show over its near 30 year history, however, is that successful investment can only ever be achieved by treating the discipline as a medium to long term exercise.
The whole point of investment is to put money aside to meet medium to long term objectives such as providing security, an income for retirement or money to leave to the children.
History shows that a simple investment strategy involving the good habit of regular saving for the longer term is one which rarely fails.
Only two prices should ever matter to the investor – the price you buy at, and the price you sell at. What happens in between really doesn’t matter, and as difficult and unsettling as it can be at times of market volatility, investors should always try to hold on to that one basic guiding principle.
Regular saving as part of a long term investment strategy offers a flexible, affordable solution for many people. And by keeping some of their wealth in liquid assets in the form of cash, deposits or short-term Government securities, investors should not be forced into cashing in investments at what might be an unfavourable time.
Additionally, investors should look at a diversification strategy, so that they don’t have all their eggs in one basket. Investing in a range of different asset classes and focusing on long term returns is generally a recipe for stock market success in any economic environment.
It is not a case of ploughing large sums of money in one go but investing wisely and consistently. Drip feeding into the market is the perfect solution for people who want to invest but are unsure of when to do it, and it removes the uncertainty of putting a large sum of money into the market in one go.
The old investing adage of time in the market, not timing the market, should remain the mantra of the prudent, long term investor. Attempting to pick the bottom, or top, of the market is a challenge fraught with danger.
Whatever investment route you choose, be it a lump sum investment or regular contributions, the key is to seek specialist advice from a wealth expert and make sure you get the money into funds that will be managed for your benefit over the longer term.
And then forget about them. If you follow these simple rules you are in a strong position to build up a substantial portfolio of investments in the long run.
To receive a complimentary brochure covering Financial Planning, Pensions, Protection and Inheritance Tax Planning, contact Stephen Samuels of Samuels Financial on 0161 773 5777, email email@example.com or visit samuelsfinancial.co.uk