Money: The latest news from Monty Fool - Riding high on low inflation

On Wednesday the Bank of England decided to keep base interest rates on hold, at 5.5 per cent. To your average Fool this is pretty unexciting news but it does have some relevance to the overall direction of the stock market.

Do you remember inflation? A pint of milk used to go up once every couple of months. Your mortgage interest rate was in double figures. The building society would pay savers a decent rate of interest. Those days, for the time being at least, are gone.

This also has an effect on the valuation of the stock market. Day after day, week after week, we are told that the market is overvalued. Price/earnings ratios are at a historical high, and dividend yields are at an all-time low. This, the Wise experts tell us, means the market is riding for a fall. They may be right. Things could all go horribly wrong and the market could crash in such a fashion that it would make 1987 look like it happened just for fun. A 20 per cent fall in the market in one day would see the FT-SE 100 trade at about 4,800. For those Fools with memories that go back five months, that is where we were at the beginning of October 1998. That perhaps puts a crash into some perspective. It wouldn't be the end of the world.

The lack of inflation, and therefore low interest rates, has a positive effect on the valuation of the share market. No one of working age has lived in such a low-inflationary environment. In years gone by, apart from the share market, there were other quite attractive options for people to invest their money. A no-risk deposit in a bank, building society or government bond would yield an investor upwards of 10 per cent interest per annum.

When you compare that with buying a share in an individual company, where the historical returns have been about 12 per cent, you can see why investors weren't so keen on the share market. The additional risk involved was just not worth it.

Today, the benchmark 10- year government bond yield is about 4.4 per cent. Suddenly the share market, with its historical 12 per cent returns, looks an attractive option.

This is one of the reasons why the market is at high historical levels. In fact, it could be that over the next five years, starting from now, the stock market doesn't match the long-term growth performance that it has achieved in the past. Is this a reason not to invest in the market? We Fools think not.

Warren Buffett, the world's greatest stock market investor, this week said: "You know valuations are high by historical standards. You know the level of speculation is high by any historic standard. And you know that doesn't go on forever. But you don't know when it ends."

You can invest in the share market, and you can do so now. A monthly contribution to a low-cost index tracking fund means you can drip-feed money into the market over an extended time period. If the market does turn out to be at its peak, you avoid putting all your money in at the top. But, before you do that, we'll leave the last word to Mr Buffett, who is undoubtedly a Fool.

"You shouldn't buy on borrowed money. You should pay off all credit card debt before you buy any shares, because you're paying 18 per cent on credit card debt and you're not going to make more than 18 per cent a year in the market."

NAME THAT COMPANY

This company is best known for its hand-held computers, but it is losing ground. Last year, it initiated a joint venture named Symbian, and hopes to develop the standard system for wireless communications. Name this company and one of the others involved in Symbian.

n Answers to UKColumn@ fool.com or snail mail to Foolish Trivia Quiz, Independent on Sunday, 1 Canada Square, London E14 5DL.

n Last week's answer: Unilever, co-chaired by Niall Fitzgerald and Morris Tabaksblat.

MY BRIGHTEST INVESTMENT

Send us your brightest or dimmest investment story. If we publish it, you'll get a free copy of the `Motley Fool UK Investment Guide'. E- mail to UKColumn @fool.com or snail mail to Motley Fool, The Independent on Sunday, 1 Canada Square, London E14 5DL.

I took a closer look at the annual statement I received from my pension provider and was horrified to find that the return I was getting was barely more than I might have expected from a building society. Of course, this was due to the effect of high charges and poor performance. I have transferred to a low-cost, index-tracker pension from a direct provider, which gives me low charges, flexibility, enhanced performance potential and (best of all) obviates the need to consult (and pay in the form of commissions) a so-called "independent financial adviser".

AL, London

The Fool responds: What more can we say. You are now a true Fool. The best person to look after your financial affairs is YOU. Only you have your best interests at heart. IFAs have to make a living, and that comes at your expense. An index-tracking fund will see you beat the investment returns of about 90 per cent of unit trusts.

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