Last week the FTSE 100 dipped below 7,000 amid growing fears that US President Donald Trump will trigger a global trade war and, although it rallied to close at 7,183.64, investors remain jumpy.
The benchmark index of top UK companies is just 3.7 per cent higher than it was on December 31, 1999, more than 18 years ago, when it closed the year at 6930.
If you had told people celebrating Millennium Eve that stock markets would go nowhere for almost 20 years, they would scarcely have believed their ears.
So why are markets in such a state and is there anything you can do about it?
Stock market investment seems like a troubling prospect at present, but you can still do it safely
Patient investors can still get their rewards
Almost every adult Briton has a stake in the stock market, either through a company or personal pension, a tax-free Isa, or other savings and investments.
Most will still have made good money from stocks and shares over the last 18 years, despite the lack of headline growth in that time.
Almost nobody will have invested all of their money on Millennium Eve: the overwhelming majority will have spread their investments over years and decades, mostly when markets were trading at far lower levels.
Investors will also have benefited from dividends, the regular payments that companies make to shareholders as reward for holding their stock.
You can draw them as income, but dividends work hardest if you reinvest them back into your portfolio for further growth.
Russ Mould, investment director at AJ Bell, said that while the FTSE 100 has given a meagre capital return since the turn of the millennium, with dividends reinvested you would have made a total return of almost 90 per cent: “Patient investors can still get their rewards, provided they are capable of withstanding the ups and downs of capital values in between.”
The index currently offers a generous yield of around 4 per cent, far more than you can get on cash.
Dividend reinvestment can result in a healthy return
However, investors have a right to feel let down, especially after the glory years of the 1980s and 1990s.
This millennium has been a rollercoaster ride by comparison, with the dot.com crash in 2000 and banking meltdown in 2008. Even the recent bull run was a phoney one, fuelled by rock-bottom interest rates and trillions of dollars, sterling and euros of quantitative easing.
With the UK slowing over Brexit uncertainty, recent growth has come from the US, especially big technology stocks such as Facebook, Amazon, Netflix and Google-owner Alphabet, and emerging markets such as China.
However, investors can no longer rely on them, as the world’s biggest and second-biggest economies square up for what would be a highly damaging trade war.
Jan Dehn, head of research at Ashmore Group, said Trump’s trade war with China is a policy mistake of gigantic proportions: “Protectionism tends to be contagious: when one country starts imposing tariffs, retaliation is easily justified. The risk is a cycle of escalation with spiralling costs to all involved.”
Many blame US protectionism for worsening the 1929 Wall Street crash, triggering the Great Depression of the 1930s and the rise of fascism.
Dehn said that as the US looks inwards, Brexit Britain needs to forge trade links beyond Europe: “For the UK, the future as a free-trading nation outside the EU can be made a great deal less precarious by deepening trade ties with China.”
Spread-betting group IG’s chief market analyst Chris Beauchamp said the risks of miscalculation are still high: “In this game of chicken, no one wants to be seen to blink first.”
Investors should be wary of putting more money into the stock market right now. “The sharp rallies of the past two months were quickly followed by sell-offs,” he added.
Trump’s potential trade war with China has been hailed as a huge policy mistake
KEEP YOUR NERVE
The best thing most investors can do is sit tight, wait for markets to calm down and keep reinvesting their dividends.
Retirement Advantage pensions technical director Andrew Tully said pensioners in income drawdown need to be careful: “If you withdraw money after markets have fallen you are only compounding your losses, as those funds will be locked out of any recovery.”
Those wondering whether to invest more money should remember investment legend Warren Buffett’s famous maxim: “Be fearful when others are greedy and greedy when others are fearful.”
In other words, you can take advantage of recent dips to buy shares at reduced prices, but only if you plan to stay invested for the long term.
If you are looking to use your brand new £20,000 tax-free Isa allowance for the 2018/19 tax year, consider setting up a regular monthly investment plan instead of risking large lump sums.
MoneyToTheMasses.com founder Damien Fahy said this turns volatility to your advantage: “You actually benefit if markets fall, as your regular monthly payment buys more stock.”
Naturally, this assumes that markets will continue to rise in the longer run, which should still be the case over, say, five or 10 years. However, given recent market performance, this no longer looks the certainty it once was.