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Make sure you’re worth more than a smidgeon

Alan SteelLast week we had our Spring UK Budget. Immediately afterwards I, and a hundred others, strived manfully to report all the changes. A week later the biggest fund raiser change for the Government is dumped by public demand. All that analysis for nothing.

Sharing the headlines as that happened was the shock horror announcement from the US.  No, not Donald Trump.  Fed chairman Janet Yellen and her committee of economists had decided to hike US interest rates.  One headline I saw said (as a consequence) that “The US Dollar slumped”.

Erm, not that I could see.  Not against the pound or the euro, although with the assistance of a microscope you could see it was a smidgeon down against the Japanese Yen.  Whatever that meant.

While my memories of school classes in arithmetic disappear more quickly than I’d like these days,  I can’t imagine we’d ever mistake a “smidgeon” for a “slump”.  Or an increase of 0.25% (one four hundredth in old money) for a hike!  When I was young, stealing apples off a tree when the big man ran oot and  telt you “to take a hike”  it’s fair to say I retired from the scene a bit further away than a smidgeon.

Incidentally, while economists, commentators and headline writers focused on the “bad news” hardly anybody noticed that bond markets and stock markets were rather happy about life immediately afterwards. 

Ben Carlson over in the US regularly churns out well considered commentary on investment issues. Hysteria has captured headlines since November over fears of Donald Trump’s likely negative impact on world stock markets, but so far pessimists have been wrong yet again.  Early days though.

But just to check possibilities, Carlson analysed US stock market returns all the way back to Hoover from 1929 onwards.  For the record that’s 13 Presidents prior to Trump.  A fair mix of Democrats and Republicans.  He then noted all “market Losses” or crashes, if you prefer,  during each four year term of office, whether an incumbent President was returned for a second term or not.  Market experts refer to any drawdown of 20% or more as a bear market, less than that and it’s a correction.  

For ease of calculation a bear market is definitely a big slump and a correction is a lot lot bigger than a smidgeon.

Every president saw corrections or bear markets during each of their  four year term. The average drawdown? 30%!  The average loss was 37% under Republicans and 24% under Democrats.

But these differences hide the bigger picture.  Going back to 1853 the total stock market returns of both parties are almost identical.  Fact is that despite all the problems, crises, wars, and political or economic turmoil, since 1942 for example, equities are a good place to be.  Buying the Dow Jones Index 75 years ago and holding on through 12 bear markets and six corrections,  and you’d  have doubled your investment (in US Dollar terms) every 10 years.

Better then to listen to Albert Einstein, who said compound interest was “mankind’s greatest discovery”. Sadly, too few investors get that.  

In the UK, 80% of all new money going into tax-free ISAs are cash ISAs, earning zilch for eight years now.  Female ISA savers have 90% of their hard-earned savings wasting away in cash ISAs. But before us men gloat about this, we’ve got 83% of our ISA savings there too. You cannae make it up.

Long term master investor Neil Woodford paid me a visit this week. His claim to fame is his stewardship of Invesco Perpetual High Income fund since over much of the last 25 years.  

His fund produced on average a bit over 12% pa rather than 8% pa achieved by the FT100 Index Total Return. That’s 50% pa more.  But thanks to the miracle of compound interest Woodford’s old fund produced three times the performance over the period! That’s money for nothing, all right. And much much more than a smidgeon extra.

I shudder to think what cash funds did. But beware, authorities ask me to remind you that past performance is no guide to the future despite all the above. So  please choose your ISA funds wisely this tax year.

Alan Steel is chairman of Alan Steel Asset Management

Alan Steel Asset Management is regulated by the Financial Conduct Authority. This article contains the personal views of Alan Steel and should not be construed as advice. Do check your individual circumstances with your advisers.

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