AIM UK

[ls7550]

If you measure the long term (80 to 130 years) Dow price levels and annualise the capital gains over all possible periods of 5 years or more then you’ll see an average overall figure of around 6.5% p.a. Add on 3.5% average dividends and total investment returns average out to around a 10% compound rate. Over 20 years that amounts to a 3.52 gain factor when based on capital gains only, or around 6.73 gain factor when dividends are reinvested.

Buying into stocks when yields are relatively low – perhaps 2%, is akin to buying a $100,000 house at 75% premium ($175,000) during a boom period. Similarly buying into stock when yields are 5.5% is akin to buying a $100,000 house at 36% discount ($63,000) during a depression.

If you buy at the peak and sell at the trough then you have a 63 / 175 = 0.36 factor working against you – you’d be swimming against a very strong tide.

Buy and the trough and sell at the peak and you have a 175 / 63 = 2.7 factor working for you - sailing along with a very strong tail wind.

Over a 20 year investment period, an investor who bought and sold at average price levels might anticipate a 10% p.a. compounded average.

An investor who bought at a peak and sold 20 years later at a trough might anticipate a 3.52 * 0.36 = 1.27 capital gain factor, or around 1.2% compounded capital gain p.a. supplemented with a 2% dividend (3.2% p.a. total benefit).

An investor who bought at a trough when yields were perhaps 6% and sold at a peak when yields were 2% might anticipate 3.52 * 2.7 = 9.5 gain factor or around 11.9% p.a. compounded average supplemented with the 5.5% dividend income = 17.4% p.a. total benefit.

With recent FT All Share yields in excess of 5.12% the indications are that relative to the longer term we are much closer to a trough buying opportunity than we have been for a considerable number of years. Investments added now may provide total investment returns in excess of 15%+ p.a. over the long term if later sold in perhaps 20 years time at a peak price level (when yields are around 2%).

Over the longer haul typically dividend values grow in line with gains in stock capital values. So you might buy an Index fund that pays perhaps 5% or more yield and simply forget about the investment. Likely the stocks will grow both their capital value and dividend payouts at a good rate.

The worse you could do at the present time is sell stock, as then you’d be selling at a trough after having bought at a peak. It is likely far better to be adding new funds into the market at the present time instead.

Not to say that stock prices might decline further, but if they do then having bought and forgot you can ignore such paper values and come back in 5 or 10 years time to review where your investment stands at that time, and likely you'll be satisfied with the results.