1 November 2023

We take a look at cash versus investing. It may seem that cash is offering good value but it is guaranteed not to beat inflation! We also take a look at the 2024 US election and how much it matters to investments…

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Cash versus Equity Investment
With low interest rates being the norm for the last 20+ years the question of whether to invest in cash or stocks was quite easy to answer. This has now become somewhat more difficult in the last couple of years, with rates on deposits of over 5% available. The question that some people are therefore asking themselves is “with cash earning around 5% why risk money on the stock market?”
Whilst rates have significantly improved, one has to consider if they are keeping pace with inflation. Inflation peaked at 11.1% and even now is remining stubbornly high at 6.7% so we can see from this that cash deposits are not keeping pace with inflation which effectively means losses in real terms.
Time horizon is also a very important factor to consider. If you know that a set amount of funds will be required in 12 months time then it would be risky to invest this in the stock market due to the volatility involved. Conversely if funds were not required for 10 years, more risk could be taken in the knowledge that over longer periods stocks have far more chance of outperforming inflation. Please see the table below for an illustration of this:
Analysis of the 20-year timeframe shows that in the last 96 years every 20-year timeframe stocks outperformed inflation.If we look at long-term returns below:

In the past five, ten and 20 years, cash savings have failed to keep up with price rises and so depositors would be worse off.

Over very long periods – during which inflation and interest rates have gone through both highs and lows – cash has retained its spending power, but only just.
By contrast, stock market investments have delivered inflation-beating returns over all periods, highlighted in the chart.

In conclusion, different risks are attached to both cash and stocks and shares. Cash is far from a risk-free asset: even at today’s best available savings rates, deposits are likely to lose real value. Also, as the data shows, cash can deliver real losses over longer periods too, including the past two decades. But shares also carry risk, especially when held for shorter periods.

Darren Fuller – Clear Senior Paraplanner.

No Politics please

2024 is going to be a busy year in politics.  Our attention is naturally drawn to what happens in the UK, the bigger picture shows an absolute election-fest across the world!
  • There are leadership votes in some key international hotspots – Taiwan, Russia and Ukraine in particular.
  • India is getting ready for the largest democratic process in the world in April/May. Over one billion people are eligible to vote.
  • EU Parliamentary elections will take place in the summer.
  • Lastly, the US will take to the voting booths next November.
It is guaranteed the golden question will be asked:
“if x/y win, how will it affect my portfolio?”
Depending on political allegiance and occasionally, emotion, this question is often loaded with pre-conceived ideas. To avoid getting into the trenches on this, a better route to form an answer would be via data.
The US is a good example to use as it’s the biggest economy in the world, the election cycle is a nice fixed 4 years, and there’s lots of data. Looking at the annualised return of the US market or each four-year period (identified by the President who started, even if they didn’t finish).Here’s one of those pre-conceived ideas:

It’s often assumed that a Republican government is more “market-friendly” than a Democratic government. But does that tally up?

No – almost unbelievably, the average annualised return for each party’s period in power is the same: 7.2% pa.

So the answer is:

“In a purely portfolio sense, politics just doesn’t really matter that much …”

The Myth of Wealth Preservation

The investment world is bursting with buzzwords designed to prey on investors deepest fears, while ignoring their needs.

Let’s dive into the hypothetical. “Wealth preservation” is essentially a siren song for the wealthy, naïve investor- someone with a load of cash, no investment acumen, and paralysing fear of losing a single penny.

So what does “money” really mean? Most equate money with currency, so if you were to have 10 million golden coins today, you would expect the same amount when you cash out, regardless of when that is. But there is always inflation (the slow, steady destruction of your money’s worth), and the hidden menace of low returns (a risk no one talks about). The way to combat both threats is to park that money in a global equity fund. There would be market swings, but history suggests that the pile of golden coins, if left untouched, will grow in the long term, it may even multiply!

The “wealth preservation” myth is like spoon-feeding clients what they desire, not what they truly require. Why is it that only the affluent seem to hear this tune? Is it the false notion that once they have financial independence, there’s no further need to invest? This is one of the
many delusions peddled to the rich.

The attempt to safeguard your currency by adopting an inefficient investment strategy due to fear of short-term market fluctuations is financial folly. Investment trends show the returns are real and within reach.

Reminder – The US doesn’t always dominate
In recent years we are used to seeing charts like the one below with one equity market trouncing the others.
Guess which line represents which equity market?
You picked the US for the orange line…didn’t you? After all it’s usually the case. The rest of the world lags behind and “US Exceptionalism” is a term which is bandied about.Over time these repeated patterns stay embedded in our brains. For more than a decade the S&P 500 rule the world and it’s hard to imagine a picture where it doesn’t dominate. Like interest rates – they were low for so long that people couldn’t consider a higher rate world, until it happened!
But it wasn’t so long ago that the US market wasn’t the world leader.

Taking you back to the mid- 2000’s…..
Remember, Greece was hosting the Olympic Games and winning the European Football Championships.

The first ever YouTube video was published and Netflix was mailing out DVDs.
The charts were ruled by the Sugarbabes, Busted and McFly, and listened to on CDs.
If you were an investor, you were desperately trying to avoid the US equity market:

For four years, between 2003 and 2007, the US equity market trailed almost every other investable index. Japan, Europe, the Emerging Markets and the FTSE100 outperformed by more than 20%. We tend to assume that today’s trends are the final state of the world, but as the disappearance of the tank top and Blockbuster prove, things will change!

Inflation finally coming under control
Permanent placements decline at weakest rate in three months.
Temp billings return to growth.
Pay pressures ease as staff supply continues to increase.

Value of dividends
Price and value are two different things, as Warren Buffett knows, and when it comes to investing, we often forget that! We get obsessed with price but that’s not the whole story.
Since the start of 2000 investors in the FTSE 100 have had various events to deal with.
The graph below shows some of these. The UK’s flagship index has grown from around 6600 to around 7600 over that time.

That’s a price return of about 14% or about 0.5% per year which doesn’t seem a lot, but that does include dividends. These are a huge part of the value received from investing.

Over the period the FTSE 100 had an average 3.8% annual dividend. With that included the picture changes completely as seen below. (Both lines rebased to 100 at the start of 2000)

Rather than a 14% return over nearly 24years, the return is closer to 170%, around 4.5% per year. People concentrate on the price of what they bought, but if they invested £100,000 back in 2000, it would be worth £270,000 today.
That’s the value of reinvesting the dividends!

It’s never too early to get ahead of Christmas!

Christmas cards are now available, please consider buying them from Clear Minds Charity.
£5 for a pack of 10.

To order please click here

Interesting Financial Fact
The top 1% wealthiest people in the world have 50% of the world’s wealth according to Oxfam.





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