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How to get high long-term returns for your savings

Tuesday 7th July 2015

Written by Glenn Martin

Most UK investors hold their long term savings in cash. They regards the stock market as far too risky. This major error arises from confusing short-term risk with long-term risk. It is certainly true that in the short term (up to 5 years) stock market investments can fall significantly in value. However in the long term (10 years upwards), cash is by far the worst performing UK non-physical asset.* And equity investment is the best performing UK non-physical asset.
 
If you decide to take the plunge and invest in UK equities, you have 3 main options:
 
1. Buy individual UK shares
2. Buy an actively managed fund which invests in selected shares with the aim of outperforming the market
3. Buy an index-tracking fund which aims to replicate the performance of a particular UK equity index. The most common trackers are for the FTSE 100 and FTSE 250 indices
 
The problem with the first option is that, in order to manage risk, you need a portfolio of at least 10 shares and you need to spend a lot of time on research to ensure that you do not buy dud shares. Even then, previously respectable companies can suffer almost instant turns of fortune (remember RBS, BP and Tesco?).
 
The problem with the second option is that most actively managed funds underperform their benchmark index because, among other factors, of the high fund management fees.
 
That leaves index tracking funds and explains why these funds have recently grown hugely in popularity. My new book, “7 Successful Stop Markets Strategies” concentrates on getting the best returns from index tracking funds. The book provides the thirty-year returns achieved from adopting various index-investment strategies. These are summarised in the table below:
 
Compound Annual Returns of UK index investment strategies from January 1984 to September 2014.
 

 

 

Investment Strategy

Annual return %

Investment

value of £1,000 after 30 years

Cash – up to:

   4.1

          3,338

Buy and hold  FTSE 100; get valuation first

   9.2

        14,017

Buy and hold  FTSE 250 **; get valuation first

 11.2

        24,162

Market timing FTSE 100

 10.3

        18,935

Market timing FTSE 250**

 12.2

        31,607

Market timing FTSE 100 spread trading  - up to:

 36.9

 12,362,419

 
The first two tracker strategies are the simplest and require the least effort. Buy  and hold either a FTSE 100 or FTSE 250 tracker and reinvest the dividends. It is clear that the FTSE 250 has delivered a much higher long-term return than its more well-known brother, the FTSE 100. You can also see that the 30-year FTSE 250 fund value is over 7 times as great as that of the cash fund.
 
The next two strategies benefit from two systems which I describe in the book:
 
A market valuation system to buy the index when it is cheap and sell it when it is dear
A market momentum system to exit the market when it is in freefall and re-enter when the market has stabilised. 
 
These two systems have enhanced the 30-year value of the passive funds by at least 30%.
 
The final strategy includes the combination of the above two systems with the leverage offered by FTSE 100 spread trades. You can see that this strategy has delivered phenomenal long-term returns. However the extremely high return shown in the table involves very high short-term risk – a stop-loss level of 95% and a gearing level of 7. I have developed a simulator so that you can see how the return would be affected by specific reduced the stop-loss and gearing levels. You can access this simulator at: 
 
 
* Source: Barclays Capital 2014 Equity Gilt Study
** Returns for the FTSE 250 are calculated from 1/1/86, when the index started.
 
***Glenn Martin is founder of ShareMaestro and author of ‘How to Value Shares and Outperform the Market’ (ISBN: 9780857190475) RRP £24.99 and ‘7 Successful Stock Market Strategies’ (ISBN: 9780857194626) RRP £24.99. Both available at all good bookshops.
 





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Editorial Contact Details - Conor Shilling
conor.shilling@angelsmedia.co.uk
0845 672 6000
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