David Kuo: The past 10 years have been tough, but steady saving still works

Investment Insider

It has been a trying and frustrating decade for stock market investors.

There is the age-old view that investors who hold shares for the long term will be rewarded for their patience. The FTSE 100 index is lower today than it was at the start of the millennium. So where is the risk premium that stock market investors expect?

The disappointing return from investing in shares has prompted critics of "buy and hold" to question the rationale behind long-term investing. However, Gus Sauter, chief investment officer at Vanguard, recently warned against the idea that short-term trading could be a better substitute for long-term investing. His views will undoubtedly grate with short-term traders who believe they can beat the market by correctly timing the movement of shares. Truth is, it is time in the market rather than timing the market that adds value to investing in shares.

However, not everyone believes that buy and hold is a smart strategy. Some will argue that while the market may have delivered returns of about 10 per cent a year over the past century, the next 20 or 30 years may be very different.

Investors have walked away empty handed because shares have gone nowhere. But that applies only to those who invested at the top of the market and have not bought shares since. Most people don't invest like that. Instead, most of us keep adding money to shares when we can. So, while it is right that any investments you made around the turn of the millennium may be in the red, any money you added around 2003 would be firmly in the black – up about 60 per cent. The lesson here is that the investments you make every year will produce a different return. Some people call it pound-cost averaging. I just call it common sense.

David Kuo is director of fool.co.uk