Savers urged to make their money go further by doing one simple thing
We are living in a time of extreme uncertainty and the anxiety that comes along with it. Against the backdrop of recent high inflation and market turmoil we have wars, AI technology disruption, the cost of living crisis, and economic hardship. It's natural to wonder what effect these world events will have on our long-term investment performance.
While these challenges certainly warrant our attention and deep concern, they don't have to be a reason to panic about markets when you're focused on long-term investing. Imagine it's 25 years ago and the year is 2000.
Devolution – The Scottish Parliament and Welsh Assembly had recently been established (in 1999), marking a significant shift in UK constitutional politics.
The Millennium Dome – Opened on 1 January 2000 in Greenwich to celebrate the turn of the new millennium.
The US stock market – The Dow Jones Industrial Average had already passed 11,000 in 1999, but in 2000, the tech-heavy NASDAQ peaked above 5,000 before correcting over the next two years.
Tony Blair – Was serving as Prime Minister of the United Kingdom, having first taken office in 1997. The internet is in its infancy, Y2K looms, and everyone is worried about the Russian financial crisis.
A stranger offers to tell you what's going to happen over the course of the next 25 years. Here's the big question: Would you invest in the stock market knowing the following events were going to happen? And could you stay invested?
Asian contagion
Russian default
Tech collapse
9/11
7/7
Stocks' 'lost decade'
Great Recession
Global pandemic
Second Russian default
Ukraine invasion
Israeli invasion of Gaza
With everything I just mentioned, what would you have done? Gotten into the market? Gotten out? Increased your equity holdings? Decreased them?
Well, let's look at what happened. From 2000 to now, the world stock market has returned, on average, over 7 per cent a year. A pound invested at the beginning of the period would be worth over £6 now.
These returns are very much in line with what returns have been over the history of the stock market. How can that be? The market is doing its job. It's science.
Investing in markets is uncertain. The role of markets is to price in that uncertainty. There were a lot of negative surprises over the past 25 years, but there were a lot of positive ones as well. The net result was a stock market return that seems very reasonable, even generous. It's a tribute to human ingenuity that when negative forces pop up, people and companies respond and mobilise to get things back on track.
Human ingenuity created incredible innovations over the past 25 years. Plenty of things went wrong, but plenty of things went right. There's always opportunity out there.
Think about how different life is from the way it was in 2000: the way we work, the way we communicate, the way we live. For example, the gross domestic product of the US in 1999 was $10.25 trillion and is projected to grow to over $30.51 trillion in 2025.
I am an eternal optimist, because I believe in people. I have an unshakable faith in human beings' ability to deal with tough times. In 2000, few would have forecast a 7% average return for the stock market. But that remarkable return was available to anyone who could open an investment account, buy a broad-market portfolio, and let the market do its job.
Investing in the stock market is always uncertain. Uncertainty never goes away. If it did, there wouldn't be a stock market. It's because of uncertainty that we have a positive premium when investing in stocks vs. relatively riskless assets. In my opinion, reaping the benefits of the stock market requires being a long-term investor.
By investing in a market portfolio, you're not trying to figure out which stocks are going to thrive, and which aren't going to be able to recover. You're betting on human ingenuity to solve problems.
The pandemic was a big blow to the economy. But people, companies and markets adapt. That's my worldview. Whatever the next blow we face, I have faith that we will meet the challenge in ways we can't forecast.
I would never try to predict what might happen in the next 25 years. But I do believe the best investment strategy going forward is to keep in mind the lesson learned from that stranger back in 2000: Don't panic. Invest for the long term.
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