Many global stock markets, including the FTSE 100 index, have hit record highs, as investors have benefited from a global rally. But what do all-time highs mean for investors, who may be weighing up whether to invest, or keep their powder dry?
Risk vs. reward
Stock market highs mean that investors now face buying at higher prices. Some investors have also been concerned about higher rates, the risk of economic contraction (recession) and the related impacts on financial markets. However, staying on the sidelines in the hope of timing a more attractive entry point can be costly, as your money has less time to grow the longer you are out of the market.
Price vs. total return index
News reports focus on price indices, measuring the average share price or capital gain of a basket of companies such as the 100 largest UK companies in the FTSE 100 index. It may seem that UK equities have been standing still in recent years when looking at the price return. However, that’s only half the story. The UK dividend yield has averaged nearly 4% in the past 20 years, making up about half the total returns (price return plus reinvested dividends).
UK vs. global equities
The UK accounts for around 4% of the MSCI World Index, the most commonly used benchmark for the global stock market. While the dividend yield of UK equities is about twice as high as that of the MSCI World, there has been a notable divergence in total return performance over the past decade. Spreading equity holdings amongst different markets, a process known as diversification, can reduce portfolio risk and enhance the return potential.
Drip-feeding
Some investors opt to drip-feed lump sums into markets, eg investing it in four equal installments every three months. That way, the price of the investments averages out and this can provide emotional comfort. However, history shows that price averaging can lower returns, as stock markets tend to go up more often than down.
It's best to focus on your long-term goals rather than trying to time the market. Keeping assets in cash also makes them vulnerable to the effects of inflation. Call 03300 564 446 to find out more, or get in touch via our contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
