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July 2002

The time is now

Has the stock market hit the bottom and is now a good time to buy in? Is timing the market something you should look to do? Or is it impossible, something the so-called experts can't even achieve? Keiron Root looks for clues.

One of the oldest sayings in the City goes along the lines of "Sell in May and go away; return again on Leger day". The Leger in question is the St. Leger horse race, the final leg of the English Triple Crown, run on the second Saturday in September. The maxim was coined in a much more relaxed time, when investing in the City and owning racehorses were both the exclusive preserve of the moderately, if not seriously, rich and so people had better things to do in the summer months that sitting in a City office. Besides, it interfered with 'The Season', Old Boy.

Whilst times have changed significantly, the notion of a summer lull in markets seems to persist. The trouble at the moment is the current 'lull' has lasted almost two years. Under normal circumstances, investors would be queuing up to buy shares after such a prolonged period of under-performance, on the grounds they must be representing pretty good value by now. However, it seems that a number of sectors became so overvalued during the last 'bull' market that investors are, even now, unsure they have really come down to a reasonable level.

"It is always very difficult when the market is at the bottom because sentiment is so bad," says Ian McLeish, portfolio manager of the Scottish Investment Trust. "There's no easy answer, as market timing is so difficult for everybody. We all try to buy when things are low and sell when things are high. But what makes it so terribly difficult is that, when markets are at the bottom things look extremely gloomy, so nobody wants to invest. And when they are at their peak, they look terrific but there's no value to be had."

"If we are looking at the FTSE 100 Index, then, having seen it heading towards the 7,000 mark, and now down below the 5,000, then theoretically now is a good time to invest," observes Andy Buchanan of financial advisers Sedgwick's. "However, the private investor is unlikely to be able to call the top, or the bottom, of the market. If they get close, that should be good enough.

"The consensus of opinion is that we are now near the bottom of the market and the market is certainly a lot less volatile than it was last year," adds Buchanan. "The irritating thing is because it's been rather frustratingly drifting along the bottom, but there is a lot of optimism at the moment that things are going to improve."

"Clearly the news is awful at the moment and the stock market is back down to levels we haven't seen for years," says Hilary Cook, director of investment strategy at Barclays Stockbrokers. "It's not just worries over Intel and Enron, but you've also got concerns over war in the Middle East, nuclear war on the Indian sub-continent and so on. However, it is exactly at these sorts of moments when, if you are feeling brave, you will make a lot of money."

"Somebody once said something about 'Investing to the sound of gunfire', but there is so much gunfire about at the moment it's difficult to know which particular gunfire to react to," observes Philip Titchener, marketing director of Exeter Fund Managers. "Markets are at best going sideways and investors are waiting for some positive signs. This is very much a stockpickers market."

There is little doubt that the past two and a half years have seen an usually long period when the stock market has been drifting downwards. According to the Barclays Capital Equity Gilt Study, which tracks the relative real returns of shares, gilts, corporate bonds and cash over the past century, the last two calendar years, 2000 and 2001, saw a cumulative drop of 21.2 per cent in the value of UK shares. This was the first time that the UK stock market has had two consecutive years of 'negative returns' (i.e. investors, on average, lost money over the year), since the dark days of 1973/1974.

At the beginning of the year, market commentators took some comfort from the fact the last time we saw three consecutive negative years was during the Great Depression of the 1930s and that things today certainly aren't as bad as those days. Set against that, the market crisis of 1973 and 1974 saw UK shares lose nearly 73 per cent in real terms, so there could still be a lot worse to come.

What encourages equity investors is the thought that any one who had invested £1,000 in the UK stock market at the beginning of 1975 (as measured by the FTSE All Share Index) would now be holding an investment worth fractionally under £92,600, even after the disasters of the last two years. However, it must also be admitted that the value would have been worth almost £118,000 at the peak of the market at the beginning of September 2000.

"Yes, I would say now would be good time to get into the market," observes Clive Anderson [ No, not that one - Ed. ], senior broking manager at stockbrokers Hoodless Brennan. "Obviously there is a bit off nervousness in the market as it has gone below the psychologically important 5,000 barrier. During the two days we had off for the Golden Jubilee, the US market came off quite a bit and we have followed it down. However, we had a high of around the 6,700 level, so we have come off a long way already."

"It is important to look out for bubbles but it is just as important to look out for excessive gloom," suggests Brian Dennehy, of IFA Dennehy Weller. "A good technical indicator of this is if you see a chart which shows that the market is 20 per cent below its 200-day moving average. Traditionally, that has been a good sign that the market is getting overly gloomy and investors should get back in."

So there would seem to be little doubt that, on past evidence, current market conditions indicate an attractive time to get into the UK stock market. "Very low interest rates, low inflation and a growing economy all mean that now is a good time to buy UK equities on a five to ten year view," says Rob Page, marketing director of New Star Asset Management. "This also means you should avoid tracker funds if you believe that the consensus view for lower nominal returns from UK equities going forward is correct. Some experts predict that UK equity returns will be as low as 5 - 7 per cent per year in future. In a low growth, low inflation environment, you should back true, active management to deliver stronger returns and out-performance."

Such sentiments are exactly what you would expect someone from a management house running actively managed funds, but Rob Page is also practicing what he preaches. "No one can forecast the bottom of the market - if they tell you they can, then they're lying," he adds. "My own personal strategy is to combine a low initial lump sum investment now, with dripping money into the market through a regular savings plan to balance the risk. Now looks a good time to invest, but if you're making regular savings and it turns out that this is not quite the bottom of the market, you still can't go too far wrong. The worst thing you can do is not to be in the market at all."

Andy Buchanan also stresses the need for investors in the stock market to see it as a long-term commitment. "The most important thing is the length of time that your money is in the market. For example, in any five-year period, there is usually a time when markets don't go well but, invariably, you make money in the end. Now people who invested a couple of years ago might have difficulty believing that, but the important thing is to stick with it."

Hilary Cook agrees. "When you're investing in equities, you have to take a long-term view, which means at least five years, and you have to stay invested. Investors sometimes ask themselves if they might try to finesse their timing of the market and it is an incredibly difficult thing to do as, when you least expect it, the market is likely to jump 10 per cent."

She adds "I haven't seen the raw data that shows most market gains have only come on a few specific days, but I have seen it cited enough by reputable sources to believe it. Certainly, you will get days when the market will go up by 100 points and that is a very big slug of return to miss out on."

"Your investment strategy depends on your personal circumstances," observes Hoodless Brennan's Clive Anderson. "The amount of time you'll be investing for also depends on your personal requirements, although one thing you can say is you will never be poor if you take profits. However, some investors will be in for two years, some for five years whilst others will be building up a portfolio for retirement and where they invest will depend a lot on these objectives. If you're looking at yields, then the utility sector and some mining stocks are attractive, but it really does depend on the type of investor involved. One client might happily be able to lose £1,000 whilst another won't want to lose £100."

"A lot depends on your timescale," says Scottish Investment Trust's Ian McLeish. "If you're a long-term investor now is probably a good time to buy, but if you only have a short-term perspective, say six months or so, it's probably not such a good idea. There is definitely a case for the regular savings route, particularly in markets such as these where we don't expect things to improve significantly for at least the next six months. So now might not be a bad time to start."

So is there any point in private investors trying to time the market at all? "For beginners, people who are new to the stock market, I would say don't even bother thinking about market timing, because no-one has ever got it right, including the professionals," says Brian Dennehy. "Instead if, after looking at your personal circumstances you're comfortable with medium risk investments, which is what UK stock market funds are, then just go ahead and do it. The point about markets going down instead of up should be considered more in relation to medium-term risk, than whether you should go into or out of the market or not."

"Timing might be everything in comedy but investing is a serious business," says Phillip Titchener. "The average investors may have been unfortunate with his timing with his technology ISA a couple of years ago and again last year, but these events should have brought home the message that the best approach is a steady drip, drip, drip of money into the market."

"You will benefit from investing at lower than average cost with regular savings," says Hilary Cook, "although your returns are going to be weighted towards the later stages of your savings period. This means you won't worry too much if the market is going nowhere in the early years, so it is a good thing to do if you are nervous about the markets. It's dangerous to say 'I think the market is going lower, so I'm going to come out this month', as you never know what is going to happen."

However, when markets do recover, investors, even those making regular savings, should not be afraid to take profits. "Another important point, particularly with regard to regular savings plans, is that we often come across people with, say, a ten year savings plan who have done very well for 8 years and then hold on for the last two, and it is Sod's Law that there is going to be a bear market during those two years," says Brian Dennehy. "There's an argument with any medium to long-term regular savings plan that when you get to within five years of maturity, you should start to reduce the risk profile of your plan, which means starting to switch out of stock market investments.

"This also goes for pension plans, but very few people seem to do it," Dennehy adds. "Also, very few people apply stop losses to their fund investments, but with it being much cheaper to buy funds these days, perhaps people who are prepared to take a 10 per cent loss should think about putting a stop loss in place at that level."

Using collective investment funds also means that you can spread your risks, since it is much easier for private investors to get a global spread of investments through unit trusts or investment trusts, so it is not necessary to put all of your investment into the UK stock market. "We've been saying we thought Europe and Asia were more attractive markets than the UK for some time, although that was when the UK market was somewhat higher than it is now," says Barclays' Stockbrokers' Hilary Cook. "As a UK investor, you want to be more heavily invested in UK shares, but your portfolio will benefit from diversification. We still think the markets of Europe and Asia will recover more than the UK, but the way for private investors to get exposure is through collective investment funds."

Ian McLeish concurs. He notes that "….the UK market has held up reasonably well, because it's a more defensive market, so the scope for recovery is also correspondingly less. We don't think the UK is as attractive as some other markets that have had deeper recessions and, therefore, where the prospects for recovery will be greater."

However, the clear message from the investment community is that they can't call the tops and bottoms of the markets, so private investors shouldn't even attempt it. Feeding money into the market steadily over time, spreading your risk, accepting that shares are long term investment and having the patience to wait for the market to turn again, this is the approach private investors need to adopt if they want to make money out of the stock market.

GOING IT ALONE

Investors who wish to put money directly into shares have a large range of services at their disposal which enables them to do so quickly and relatively cheaply. The most cost-effective are the 'execution-only' services that operate via the internet or telephone. As the name suggests, these are straightforward dealing services that require the user to know exactly what they want to buy.

Increasing numbers of such services, however, will also provide more detailed research information, usually for an extra fee, and some have developed a range of courses designed to help inexperienced investors learn more about the stock market. Two of the most comprehensive are those offered by the StockAcademy and Charles Schwab's online Investor Education Centre .

StockAcademy is an online brokerage which specifically focuses on investor education. It offers a range of online courses starting with introductory subjects including 'The first principles of investing', 'Risk & Reward' and 'How the Stock Market Works', moving onto to more detailed intermediate and advanced course as its customers become more experienced investors. Charles Schwab's Education Centre also offers a range of courses dealing with topics like the fundamentals of investing, investment strategies and where to invest in a bear market, as well as a glossary explaining common, and not so common, investment jargon. An alternative which is not linked to a specific stockbroker is Trade Basics which provides free access to a range of online investor education packages.

The material provided by brokers is, of course, linked into the provision of sharedealing services and dealing costs should be taken into account when deciding whether a share is good value or not. StockAcademy charges a flat rate of £15 per trade, whilst Charles Schwab's standard MarketMaster Service is £12 for trades up to £1,000 and £15 for trades between £1,001 and £2,000 for internet trades (£20 and £24 respectively for telephone trades). £12 - £15 has become a standard level for smaller bargains dealt online, but some brokers offer even lower charges - for example, Hoodless Brennan's service offers trading for £7 - a bargain.

Another new development aimed at investors who want to buy shares directly - but who also like the benefits of regular saving - is Halifax ShareBuilder . This online service operated by Halifax Share Dealing links a cash account to a sharedealing service, which allows customers to put as little as £20 per month directly into the stock market. The account can hold fractions of shares and the dealing charge is only £1.50 per trade.

Keiron Root
© Personal Finance, July 2002
www.pfmagazine.co.uk