The scariest stock market chart in 300 years

Most people are believe stocks and shares are the way to go for long-term investment. But you should be wary of holding too many equities, says Bengt Saelensminde. Here, he explains why a well-balanced portfolio is crucial for investment success.

Tim Price is a true original thinker and someone I admire as an investor. And as director of investment at PFP Wealth Management, his mainstay business is equity investment. So when he tells me to be wary about stocks, I sit up and listen.

Well Tim did just that in a thought-provoking piece in this week's MoneyWeek magazine: Forget shares your money's better off elsewhere. (If you're not already a subscriber, subscribe to MoneyWeek magazine.) Today, I want to give you the crux of his argument. It's a vitally important observation about shares. Keep reading and I'll also show you a chart that will devastate many long-term equity bulls.

But it's not all bad. Once you've recovered from the shock, I'll show you how to bring your portfolio back into balance.

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Why we can't get enough of equities

Most people are absolutely convinced that equities are the only way to go when it comes to long-term investment. There are various reasons for our love affair with stocks.

First and foremost there are the vested interests of brokers and fund managers. They make thousands in commissions every time they sign up a new pension saver.

Think about it. Bonds and commodities don't need much active management. But a buy & hold' strategy doesn't attract much in the way of commissions. Equities, on the other hand, always need to be looked after' which invariably means more trading, hence more fees.

And when it comes to equities the fund manager has an opportunity to set out his pitch. "We're the leading specialists in the sector and we've got the top analysts" that sort of thing. After you've read a bit of the spiel, you'll be bending over backwards to hand over your cash.

Then there are the newspapers. Much more interesting to fill the pages with ideas on exciting equities than drone on about boring old' bonds, or the benefits of holding a little cash back.

But we can't just blame others. There are also our own gambling instincts. Though we like to convince ourselves that we're rational investors, there's something in us that craves to do that little bit better than everyone else. We're not happy getting average returns. We want to beat the market. And more often than not that means punting on equities.

But it's time for a reality check and that's where that thought-provoking chart from Tim comes in

Beware: Equities may not be all they're cracked up to be


Source: UBS research report

Tim's chart shows the return from stocks over 20-year periods for the last 300 years.

Look at the right hand side. For the 20-year block in the eighties and nineties stocks returned on average 8-10%. Not bad. In fact, not bad at all.

But here's the scary thing. The eighties and nineties were a one-off aberration.

The chart is absolutely damning. For every other 20-year block over the last 300 years, you'd have been looking at returns of somewhere between minus 6% and plus 4%. On average, it looks like investors do well to break even.

This makes it vitally important that we balance our portfolios with less sexy, but potentially more profitable and safer' investments. That's why I'm a keen advocate of bonds, commodities and even holding cash if necessary. I've been trying to get that point across since day one in The Right Side.

This is not about dumping all our equities. I'm not saying that at all. There will always be some cracking opportunities in individual stocks. You just have to find them! My point is that it's balance we're after the sort of balance that's sadly lacking in many a private investor portfolio.

Here are three reasons why I still like selected equities and the best way you can get exposure.

UK stocks look reasonable value

Whether you win or lose on an investment often comes down to your in-price. Buy expensive and you're going to have to find a bigger fool who'll pay more later on. The FTSE 100 currently trades at less than ten times earnings against a long run average of about 14 that looks cheap.

Of course the earnings side of the equation may fall, but defensive stocks offering decent yields look attractive. And with dividend cover coming in at around three times (ie stocks can afford to pay the dividend cheques three-times over), there's a lot to be said for carefully selected stocks.

Recently I suggested an ETF that will give you exposure to the UK's top 50 dividend yield payers. As well as getting a reasonable return, you're also getting an inflation hedge. That's not to be sniffed at.

International exposure

Given the international nature of most large UK-quoted stocks, there's every reason to expect continued earnings stability. While the emerging markets will have their ups and downs, I expect them to motor along very nicely over the next couple of decades.

Our top companies have the experience, cash and sheer size to muscle in on these emerging markets. Though I expect domestic markets to remain tough, the long-term international picture looks good. Pick out the top world-class businesses and there's every chance they'll continue to do well on the international stage.

Take pharmaceuticals for instance. Many of the biggest names in pharma are trading on very low multiples as investors have overplayed concerns about drug patents running out and faltering Western markets. Find out why pharma is one of my favourite sectors and see my favourite investment trust in the sector here.

Quantitative easing

Tim's chart covers an exceptionally long period of time 300 years! Through much of that period, the globe was on a gold standard and the banking system operated on a much tighter leash than today. But today the world is a different place. Recent moves from the central banks suggest that they're intent on printing currency to help lube the economy into growth. Ultimately the new money will end up somewhere. And that somewhere is likely to be financial assets. Stocks and commodities should benefit.

Now, I'm a gold bull and it's my commodity of choice. If the central banks go bananas with too much QE, if you own physical gold then you're considered to be holding the ultimate insurance against financial calamity.

And there's one way of playing the stock and commodities bull in one hit. That's with gold mining stocks here I describe an ETF that gives you exposure to the world's largest gold producers in one go. OK, mining stocks are riskier than owning gold itself. But this ETF is the least risky way I've seen of holding gold stocks, as I explain in this article.

Read Tim's full article, plus subscribe to MoneyWeek magazine.

This article is taken from the free investment email The Right side. Sign up to The Right Side here.

Important Information

Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

Managing Editor: Frank Hemsley. The Right Side is issued by MoneyWeek Ltd.

MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798.

Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.


He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.


Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.


Bengt also writes our free email, The Right Side, an aid for free-thinkers on how to make money across financial markets.