Take it easy
In the FT last week it was reported that two separate studies, one American and one Chinese, found a definite link between the rate of heart attacks and stock market movements. The Chinese study found that those people who were constantly monitoring their investments were most affected compared to those who paid little or no attention. This got me wondering why people are prone to look at their investments in the stockmarket so closely, compared to other investments they may have such as property, and would it not be better for everyone's health if they viewed everything the same way.
The stockmarket is open for business every day, which is both a blessing and a curse. It is a blessing as it means if you want to buy or sell an investment it is always possible, but it is a curse as it allows investments to be priced by the minute. Imagine if property was priced the same way. It would be carnage!
Estate agents will tell you that the best time to put a house on the market is the Spring as there tend to be more buyers looking for property at that time, and more likelihood that the seller will get a good price. Does anyone panic when confronted with this wisdom? No. Why, therefore, when news is bad and the price of shares falls does the world get into a tizzy? Why do people not apply the same logic to their stockmarket linked investments as they would to selling a house, i.e. wait until the market improves? Beats me.
In my village there has been a house for sale for the last six years. It appears a very nice house from the outside, but it has not sold before now as the offers made on it have not been high enough. Now, I do not know the owners personally, but I doubt they would show the same amount of patience when it came to any stockmarket investment, which is a shame.
Let us assume that at the start of 1991 you had bought a rental property for £100,000 and at the same time invested £100,000 in the Invesco Perpetual High Income Fund and taken the dividends as income. Based on the Nationwide UK house price index the property would now be worth £303,350 and providing a gross income of £16,000 per annum. A reasonable investment.
The Invesco Perpetual investment on the other hand would be worth £625,050 and paying an income, net of basic rate tax, of £23,600 per annum. Compared to the property investor they have had no hassle as all they have had to do is sit back and get the income paid into their account twice a year. No need to appoint a letting agent, or do it themselves. No worries that they may get a call in the middle of the night saying the property is flooded, or that the tenant has removed all the fittings. No, all they have paid over the years is a 1.5% annual management charge which is included in the price of the fund.
When it comes to realising some, or all, of the investment the stockmarket investor also has far greater choice. As it is a fund they can sell part of the investment whenever they want and could sell sufficient units each year to use their annual Capital Gains Tax (CGT) exemption. The rental property owner has no such luxury with any sale more than likely being an all or nothing matter with CGT very difficult to avoid.
Now, over the last twenty years we have seen any number of periods where the price of the Invesco Perpetual fund has fallen, and there is not enough room to list all the economic problems we have seen in that time. In fact the price per unit is still not as high as it was in 2007. But does that really matter to the long term investor? They are getting an income equivalent to 23% of their original investment and this income has risen 4-fold over the twenty years.
So what about the depositor who keeps their cash in the bank as they do not want any risk? If the £100,000 had been kept in a bank account for the last twenty years and the interest taken as income it would be worth £100,000 today and the interest this year would be £2,500 if they were lucky. In fact for the bank depositor, compared to the interest they would have received initially, their current income is less than a third of the level it was at the start. If anyone should be having a heart attack it is them!
So the key to good health is keep your cholesterol and blood pressure under control and avoid looking at your investments too often. And if you must watch the news keep a defibrillator handy!
For and on behalf of Alan Steel Asset Management
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