Saturday, 19 February 2011

The wild and wonderful FTSE



UK equities have done spectacularly well since the beginning of 2009. Although, the Footsie hasn't quite regained all the losses incurred at the time of the financial crisis, it is almost there. If current trends continue for a few more months, the Footsie should surpass its precrisis highs.

At this point, I suppose I should warn you that the previous paragraph t is not a recommendation to buy anything. As the familiar investment mantra warnds, share prices can go down as easily as they rise.

Even though the Footsie has enjoyed a reasonably steady recovery prices have still swung around quite violently. The extraordinary volatility emphasises the great strength of equity markets. It is quite possible to lose large amounts of money on equities. As the chart amply illustrates, when prices crashed in 2008, investors suffered appalling paper losses.

Moreover, when investors make losses there is no recourse to a taxpayer bailout. If an investor places their money on a share that turned out to be a dog, they have to suck up the losses. Therefore, no one can complain or feel aggrieved if those same investors are now making healthy gains.

So if you've made any money recently on the Footsie, I congratulate you. If you start making losses tomorrow, it is your business and I don't want to hear about it.

3 comments:

H said...

Yes, at this rate it might even get back to where it was in the late 90s!

miken said...

Hi Alice,

Great post.

Try expanding that graph for the past 13 years:

http://uk.finance.yahoo.com/echarts?s=^FTSE#symbol=^ftse;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;

Then you see the FTSE has gone nowhere. It's a waste of time investing long-term in my opinion. I have tried to state the many reasons why the FTSE will not continue rising on other sites like the m@rketoracle and my reply has not been published. Vested interests are surely playing a part.

My theory is that many so-called 'intelligent' investors have already bailed out of the housing market and into shares (or share related investment funds/bonds). But this inward investment is tailing off and over a number of years we will see the FTSE fall.

Essentially one must identify the growth sectors. I feel the top 100 companies are not (on average) going to continue growing as a cutback induced recession starts to bite.

The only time I feel to invest in the FTSE is when the impact of the all cuts have been felt and the UK economy is growing. One has to also consider whether the amount of new investment is greater than the amount being cashed in (such as pension funds due to an ageing population, etc). The same is also true for investing in houses. We have all heard about people using their investment houses as pensions. At some point in the future these houses will be sold and I am sure this will impact on house prices.

During the bad times people tend to cash shares and metals to generate income to maintain their lifestyle. This in itself puts a brake on the rising share prices.

I agree that the surge in the FTSE cannot be completely explained. Don't you think though it is a huge coincidence that it correlates to a period when QE was being generated?

Another thing is that I feel deeply uneasy at investing in shares when overall the FTSE is ping-ponging. Some days it is as much as +2%, others it is -2%. This suggests to me a large proportion of short term investors and another reason why not to invest long term.

Rick said...

It's got another 2-3 months to run before the next crisi hits!