The outlook for the economy over the next three months is “exceptionally strong”, according to the Confederation of British Industry.
Its latest monthly survey of 675 firms indicated that growth expectations were the strongest since the employers’ organisation started collecting data in 2003.
How should investors react to this positive news? Would now be a good time to invest in the stock market?
The byword for investors should be “caution”. It is possible that much has already been priced into financial markets, so it could be too late to invest in the hope of the market rallying further.
The truth is that very little in the way of news – good or bad – can be relied upon as an indicator of the future, and predicting short-term movements in either direction with any certainty is impossible.
A few examples from history illustrate the point.
When New York’s World Trade Centre was destroyed by terrorists on September 11, 2001 markets fell 7% the next day but were 11% higher six months later.
A decade earlier, the US had launched its first bombing attack on Iraq – intuitively a destabilising event for the world – but America’s stock market rose nearly 30% over the next year.
Six months after the Cuban missile crisis in October 1962, the market was up 27%.
There is an old cliche that investment success depends on time in the market rather than timing the market.
What we do know is that, given sufficient time, being prepared to take any investment risk will be rewarded with superior returns.
UK data from (US investment firm) Dimensional Fund Advisors shows that in any one-year period over the past 50 years equities have outperformed government gilts 63% of the time.
Stretch this to any five-year period and the chances of winning with equities increases to 75%. Over 10 years the figure increase to 88% and for 15 years it is 96%.
From this, we can learn that if your time horizon is long enough, it pays to have significant exposure to the stock market.
This is true irrespective of any financial noise. Be brave, invest and know that in time you will be rewarded.
Naturally, the opposite is true and if you might need to call on your capital in the next five years or less, a very cautious approach is required.
Bill Saunders is a certified financial planner and head of financial planning at Acumen Financial Planning in Aberdeen. He can be contacted on 01224 392350.