But whatever the choice, stockmarkets are genuinely influenced by emotions, politics and economics. Prices will move up and down, unpredictably and often unexpectedly, and the reasons for their doing so are difficult to discover, even after the event.
Investors are always at the mercy of market movements, so market statistics remain a never-ending source of delight for statisticians, and frustration for managers and investors alike.
Risk versus reward
The primacy of protecting capital has always discouraged individuals from risk taking because, whatever it may mean to market professionals, risk to individuals means loss. For most, that loss could not easily be replaced.
The rich had established their place well before the invention of the computer, and looked to professionals to manage their free capital and produce an income for them. Initially, that income was from land or property but, following the advent of the industrial revolution, it also came from the interest paid from the bonds of governments, or large-scale enterprises such as railways.
For two centuries the principle purpose of investment was the purchase of a risk-free income: if desired, some element of risk would be accepted if that risk promised an increasing income over time.
The skill was in putting together a portfolio that heightened the return but kept the risk low. This began to change from the 1950s onwards as computer analysis enabled the development of stockmarket theories based on analysis of share and bond prices. But when the bad times come, it is yield that counts, for the certainty of income helps shield shares and portfolios from the worst of market swings.
The “dividend heroes” compiled by the Association of Investment Companies prove the real possibility that a portfolio of shares can outface market turbulence.
February’s market tantrum suggests that a 10-year bull market is nearing its end, or at least foreseeing difficult times to come. Economically, other than the UK, the world seems set fair – but politically it is full of risk, and financially there is much to fear.
Quantitative easing (QE) is ending and probably going into reverse: if QE kept markets content will QT, or quantitative tightening, do the reverse? Central banks are aware that inflation is picking up, and that their main task remains to keep it under control. Market liquidity is in danger from central banking mistakes, and both bond and share markets are at levels that should frighten investors.
