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ECONOMY
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THE INVESTOR
IN YOUR INTEREST
Holding tight will pay dividends for investors who ignore
peaks and troughs and take a long-term view of the markets
ByAnthony Hilton
that all dividend income is reinvested,
then shares have massively outperformed
bonds in almost any period you care to
choose
1
. However, using the same analysis
purely on the basis of the capital growth
delivered by equities – and taking no
account of dividend income – then it is
a much closer call, although equities still
have the edge.You can infer from these
gures that in most decades at least 80%
of the long-term total return on equities
comes from reinvested dividends.
It follows that short-term share price
uctuations should not matter too much
and we should try to ignore them, even if
they can be quite startling, such as when
Apple dropped 8% in a single day on
reports of slowing iPhone sales
2
. But we
instinctively believe we will be better o
trying to sell when we sense the market is
about to fall and jumping back in when
shares are on the rise again.
It is impossible to time the markets
consistently. That is particularly the case
these days, when markets seemmore than
ever prone to sudden, violent movements
that often come out of a clear blue sky. It
is not unknown for the gain of an entire
year to be accounted for by just four or
ve really spectacular trading days. Be out
of the market on one of those and you are
unlikely to catch up.
Markets have always moved sharply as
dealers mark prices up or down to
encourage business in response to the daily
news ow. But the moves are more
extreme and happen faster now because
technology means that people can react
instantly and invest their money more
quickly; plus, of course, there are banks of
computers pre-programmed to trade
automatically when they see unusual price
movements. So the short-term noise can
be quite deafening; so much so that some
A
lbert Einstein got it about
right when he said that
compound interest is the
eighth wonder of the
world.Although portfolio
management was not uppermost in his
mind, he put his nger on a truth that is
as absolutely fundamental when it comes
to investing – worthwhile rewards come
from having patience.
Barclays Capital produces an annual
report analysing stock market performance
going back to the start of the 20th century.
One of the things that emerges strongly
from the data is that when the growth of
equities is measured on the assumption