Long-term INVESTING
LETTING TIME DO ITS WORK Please refer to the glossary at the end of this brochure for an explanation of the words highlighted in bold throughout. Invest for the long term We believe that, ideally, investors should plan to invest for at least ten years. Over the long term, share prices tend to reflect the underlying reality of companies and the returns they deliver to shareholders. But over shorter periods, equity markets are rarely smooth and can experience extreme turbulence brought on by catastrophic events or just plain old erratic investor behaviour. Equity markets can overreact to new developments with unpredictable, and sharp, falls and gains in share prices. Second-guessing those shortterm moves is, we believe, a dangerous and potentially expensive game. Market behaviour We looked at how stockmarkets have moved over the past 20 years, both in the UK, as measured by the FTSE All-Share Index, and globally, by the FTSE World Index. To gauge how markets have behaved over short and longer-term periods, we took returns from the start of each month over every single year period (229 in all), every five-year period (181) and every ten-year period (121). In the charts below, we show the average returns per annum over each of these periods for the UK and global markets. We also show the likelihood, on average, of investors having made money or lost money in each. Clearly, the longer investments are held, the lower the risk of losing money. Time, not timing is key Investing a single sum in the equity markets can be highly beneficial if the investor gets the timing just right. But that is very difficult to do in practice. When market conditions become uncertain, investors will be wondering what the best course of action is. It may be tempting to sell existing holdings or delay making new investments and wait until markets feel less volatile and values are low. This strategy is often referred to as market timing. UK equities Global equities 100 2.5% 100 1.7% % Likelihood of gain/loss 80 60 40 20 19.9% 25.3% 74.7% 80.1% 97.5% % Likelihood of gain/loss 80 60 40 20 19.9% 24.5% 75.5% 80.1% 98.3% 0 1-year periods 8.7%* 5-year periods 5.7%* 10-year periods 5.9%* 0 1-year periods 8.4%* 5-year periods 5.7%* 10-year periods 5.5%* *% Average returns per annum *% Average returns per annum Made money Lost money Made money Lost money (Source: Datastream, in sterling, Morningstar, Inc., as at 30.04.15).
But trying to predict market activity over short time periods can be risky and investors are likely to miss some of the best days when gains can be made. An investor who stayed in the market throughout the past 20 years would have earned good returns, well above inflation. If, however, that investor had attempted to time the markets, he or she may have missed the best days and because markets can move sharply over the short term, those days can be very important. Invest regularly Investing at regular intervals can be a good idea to help smooth out the ups and downs of the market. As we said, timing the exact moment to enter or leave the market can be dangerous you run the risk of investing at the top of a market cycle, or exiting at the bottom. Buying continuously means that the average price you pay can be lower than if you d made one lump sum investment. Of course, when the market falls, your existing investment will be worth less. So, over time, regular investments can help smooth out the peaks and troughs. Pound-cost averaging Regular investing also has another benefit, known as pound-cost averaging. This is demonstrated in the following tables, showing the number of shares purchased by a monthly investment of 100 as the relevant share price both rises and falls. As the share price rises, the investor buys fewer shares for each 100 investment and, conversely, more shares as the price falls. This means that, on average, the purchase price paid is lower than the share price over the period. Rising market Investment Share Number of price shares bought Month 1 100 1.00 100 Month 2 100 2.00 50 Month 3 100 3.00 33.3 Totals 300 6.00 183.3 Falling market Investment Share Number of price shares bought Month 1 100 1.00 100 Month 2 100 0.67 149.3 Month 3 100 0.33 303 Totals 300 2.00 552.3 Average share price: 6.00 / 3 = 2.00 Average price of shares bought: 300 / 183.3 = 1.64 Source: M&G, for illustrative purposes only. Average share price: 2.00 / 3 = 0.67 Average price of shares bought: 300 / 552.3 = 0.54 Source: M&G, for illustrative purposes only.
Best asset class over the long term Equity (and bond) investments have historically outperformed cash over the long term*. The average annual return on UK investments between 1990 and 2015, adjusted for inflation, is 5.5% for equities, 5.1% for bonds and -0.8% for cash. (Morningstar, Inc., and M&G, as at 31.03.15). However, although cash offers very little potential for growth or income, it is less risky than equities or bonds. While there is no limit to how much an equity investment can grow, there is also no limit to how much it can fall. This is another reason why equities are best held for the long term. *Please remember that up to 85,000 of your money is secure in a bank or building society unlike a stocks and shares or fixed interest investment (Financial Services Compensation Scheme, as at 31.12.10). Hold for the long term We believe the pattern of equity returns has been compelling the longer an equity investment has been held, the less likely it has been to lose money, and the more likely to make money. The longer shares are held, the greater the probability they will make a positive return. In other words, letting time do its work has usually been the best approach to equity investment. Please remember that past performance is not a guide to future performance. The value of investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested. 100,000 UK financial history 1969-2015 10,000 Winter of discontent Personal computer launched by IBM Big Bang in the City Black Monday Hong Kong handover Credit crunch Iraq War SARS outbreak LTCM bail-out Indexed to 100 1,000 100 UK joins EEC Interest rates hit 15% Falklands War Poll tax riots Single European Market begins Berlin Wall comes down Terrorist attacks on the US Tech bubble burst WorldCom files for bankruptcy Lehman Brothers collapse Japanese tsunami Miner s strike Russian financial crisis 10 69 72 OPEC puts oil prices up 17% 75 78 Thatcher leads Tories to power 81 84 87 90 Gulf War 93 Asian financial crisis Black Wednesday 96 99 02 Enron files for bankruptcy 05 08 11 Apr 15 FTSE All-Share Index MSCI World Index UK savings rate Source: Datastream, in sterling, Morningstar, Inc., as at 30.04.15. UK savings rate 2,500+ investment.
Advantages of investing for the long term Lower trading fees Relative stability as short-term market price fluctuations tend to smooth out over time Staying invested means you are less likely to make costly mistakes Potential advantages of investing for the long term Rate of return has the potential to be boosted by stock dividends A long-term view lowers your risk Power of compounding Important Information The views expressed in this document should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser. Glossary Bond: A type of security, usually issued by a government or company, which normally pays a fixed rate of interest over a given time period, at the end of which the initial investment is repaid. Equity/Equities: Shares of ownership in a company. Fixed interest: Investments that provide a fixed rate of income or interest, and which repay the initial investment amount at the end of their life. Inflation: The rate of increase in the cost of living. Inflation is usually quoted as an annual percentage, comparing the average price this month with the same month a year earlier. Volatile/Volatility: The degree to which a given security, fund, or index rapidly changes. It is calculated as the degree of deviation from the norm for that type of investment over a given period. The higher the volatility, the riskier the security tends to be.
Contact (Financial Advisers) Financial Adviser Helpline 0800 328 3191* For further information on the M&G fund range, just speak to your usual M&G representative or call our Financial Adviser Helpline. Lines are open Monday to Friday 8.00am to 6.00pm. Investment Sales Team 0845 600 4125* This team will help if you wish to speak to a Sales Consultant who covers your area. Lines are open Monday to Friday, 9.00am to 5.00pm. Financial Advisers online www.mandg.co.uk/adviser Access in-depth information on M&G funds, daily prices and fund manager views at our dedicated Financial Adviser website. info@mandg.co.uk Email us with queries.** iview www.iviewtv.com Investment ideas worth sharing. @mandgprof Follow M&G Investments on Twitter. * For your protection calls may be recorded or monitored. Before assisting you with your enquiry, we will ask you to: Identify yourself Provide your firm s FCA number Confirm certain information relating to our mutual customer ** Please note that information contained within an email cannot be guaranteed as secure. We advise that you do not include any sensitive information when corresponding with M&G in this way. Contact (Investors) If you have a financial adviser, please contact them for further information on M&G s funds and products, and also for information on how to invest with M&G. If you invest directly with M&G and do not have a financial adviser, you can contact us using the details below. Customer Relations 0800 390 390 If you have a query regarding your M&G investment, Customer Relations can be contacted from 8.00am to 6.00pm, Monday to Friday, and from 9.00am to 1.00pm on Saturday. Investment Helpline 0800 389 8600 If you would like to make an investment, request further information on a new or additional investment, or want to read more about our products and services, call us from 8.00am to 6.00pm Monday to Friday and from 9.00am to 1.00pm on Saturday. Minicom telephone 0800 917 2295 If you have hearing difficulties, you can contact us on minicom from 9.00am to 5.00pm, Monday to Friday. For security purposes and to improve the quality of our service, we may record and monitor telephone calls. info@mandg.co.uk For information.** literaturerequest@mandg.co.uk For literature.** Write to us at: M&G Customer Relations PO Box 9039 Chelmsford CM99 2XG This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides investment products. The registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776. MAY 15 / 48206