Yet again, private investors muck up their timing
The Sunday Telegraph
Sunday 30 October 2011
By Paul Farrow
I can already hear the cries of "I told you so" in a broad Scottish accent from a financial adviser this section has called upon over many years for tips and advice on all things to do with investment.
Alan Steel, who is based in the historic town of Linlithgow, is a vocal, enthusiastic investor who always seems to be in a bullish mood. Importantly for a journalist looking for a quote, he never sits on the fence and is never afraid to shout out loud an opposing view.
Over the past couple of months Mr Steel has been at his wits' end. He has been in a purple rage at the "hysterical nonsense poured out by the media" - particularly on television, I might add - as shares plummeted while world leaders grappled with saving the global economy from collapse.
The prospect of a euro deal, and the agreement itself, have proved a remarkable fillip to shares and the FTSE 100 has surged over the past couple of weeks.
Three weeks ago the index stood at 4,950 but by Friday it had touched 5,750. And guess what? True to form, private investors have missed out, with fund sales falling in September to their lowest levels since 2008 as the FTSE tanked to below 5,000. More than £170m was withdrawn from UK equity funds.
Mr Steel has long asked: "Why is it the herd [investors] always piles into the wrong sector or investment at the wrong time?"
One reason for a herd approach is that investors follow performance, and this frequently sees them buy at the top of the market and sell at the bottom.
In 2000, for example, investors waded into technology funds when they should have been avoiding the sector. Those who bought at the peak soon saw the value of funds more than halve.
The 2006 commercial property phenomenon was another classic example. Many investors bought the funds as valuations reached unsustainable heights; the ensuing credit crisis triggered sharp falls in fund values.
There is also the fear factor - it's in our psyche to avoid buying a falling share. We sold out of shares in 2009 and then markets surged by 50pc.
Of course, Mr Steel is no clairvoyant. He admits that he didn't see the stock market shocks of August and September coming, because "in the last 150 years of data", which he links to the recognisable business cycle, "what happened then was unique". He added: "We believe it was down to hysterical media coverage which was on the back of major political dithering and wrangling on both sides of the Atlantic. It's that simple."
Ouch! I told you he didn't sit on the fence. Not that I agree with him, of course - to suggest that millions of investors, professional and otherwise, have acted off the back of ticker-tape headlines on our television screens is a little far-fetched.
My Scottish friend is not so gung-ho that he thinks share prices will go up, up and up. He believes that there will be a recession, albeit a mild one, and so he is adding a more "defensive flavour" to his clients' investment portfolios.
Perhaps if we can take anything from Mr Steel's confidence it is that investors should try to see through the noise - and not to panic when crisis looms.
He says, justifiably I would admit, that the media often ignore the good news. Indeed, my colleague Ian Cowie has frequently reminded Your Money readers in The Daily Telegraph that we should not forget, amid the bad news, that share prices can rise as well as fall. It is a point worth remembering the next time you watch News at Ten and the FTSE 100 has shed 200 points.
Article courtesy of The Sunday Telegraph
Sunday 30 October 2011