This century so far has been truly dreadful for the UK stock market. Or has it? We’ve had very volatile markets, with the century opening with the popping of the dot com bubble. Next was the crash that resulted from the banking crisis. Then, after a few years of recovery, the Brexit referendum sent the FTSE 100 into tailspin again.
And who knows what will happen when we finally leave the EU. Will it be a no-deal departure? Will UK shares crash again? Or will a falling pound actually boost share prices?
The truth
How bad have things actually gone in the 21st century? The FTSE 100 has recorded a miserable gain of a little under 15% over 19 years. So is the golden age of investing in shares finally over? We need to put that into perspective.
First off, that 15% result is in a period that commenced right at the top of the tech stock boom. What if we move the start of our period three years forward to the beginning of 2003 when the last of the tech overvaluation had been shaken out?
Doubled
Since then, the FTSE 100 has doubled in value. If you’d avoided paying silly prices for dot com shares, you’d be sitting pretty.
But even if you’d gone for a FTSE 100 tracker on that fateful century-turning day, you’d have enjoyed around 4% per year in dividends. Overall, you’d have earned about 5% per year. That’s still close to the Footsie’s longer-term performance and way ahead of any cash ISA or savings account — even if you’d piled in at the peak of one of the worst bubbles of the past 50 years.
Oh, and if you’d spread your investments to include some FTSE 250 shares, you’d have done even better — the mid-cap index has more than trebled in value (with dividends on top) in the new millennium.
What crash?
So how do you protect your portfolio in the current market crash? Well, first of all, there isn’t one. At least not over anything resembling the long term. As it always has been, long-term is the key. The secret of preparing for market downturns is essentially to treat volatile spells the same way you’d handle lengthy bull markets.
For me, that’s to invest regularly, looking for the best and most reliable dividends I can find. A good company will relate its dividends to its actual business performance, and short-term share price ups and downs should have little effect on my investment returns.
Seek dividends
In fact, I reckon a volatile stock market can provide better opportunities for dividend seekers. That’s because when share prices are down, the same dividend (in money terms) provides a better percentage yield than when share prices are higher.
So if a 100p share is offering a 4% dividend, a price fall to 80p would boost that to 5%. And buying when it’s down would lock in that 5% for all future years, as long as the dividend is maintained. Investors buying when the price is up again will get a reduced yield at the time, but you’ll have secured your 5% on your original purchase price.
If you want some more thoughts on surviving market downturns…
