Why Equities?

The focus of every long-term investor should be the growth of purchasing power – that is, monetary wealth adjusted for the effect of inflation.

The growth of purchasing power in equities not only dominates all other assets but also shows remarkable long-term stability.  Despite extraordinary changes in the economic, social and political environment over the past two centuries, equities have yielded between 6.6% and 7.0% per year after inflation – and in all major sub periods (shorter time frames) across all western countries.

The long-term perspective radically changes one’s view of the risk of equities, the short-term fluctuations in the stock market, which loom so large to investors when they occur, are insignificant when compared to the upward movement of equity values over time.

In contrast to the remarkable stability of equity returns, real returns on fixed-income assets have declined markedly over time.  Since 1926 and especially since World War II, fixed income assets have returned little after inflation.  The change in the monetary standard from gold to paper had a far greater impact on the returns of fixed-income assets than on equities.  (During the 19^th and early 20^th centuries the Unites States, United Kingdom, New Zealand and the rest of the industrialised world were on a gold standard.  A gold standard restricts the supply of money and hence the inflation rate.  From the Great Depression through World War II, the world shifted to a paper standard.  Under a paper standard there is no legal constraint on the issuance of money, so inflation is subject to political as well as economic forces.  Price stability depends on the ability of the central banks to limit the growth of the supply of money in order to counteract deficit spending).

There are three important considerations for investors to contemplate from this historical overview:

• The reduction of risk through investing in equities over the long-term
• The declining real returns of fixed income assets
• The indebtedness compounded by money supply

Point one;        there is significant evidence (in all countries) which shows the superiority of

investment returns attributed to equities – over longer time periods

Point two;        for 10 year horizons, equities beat bonds and bills 80% of the time;

                        for 20 year horizons, it is over 90% of the time; and over 30 years it is 100%

Point three;      whilst inflation and therefore interest rates are minimal at this point in time in

                        history, we know
                        (a)        governments are fuelling money supply
                        (b)        borrowing cheap money is driving inflationary affects in some sectors
                                    and regions (Auckland)
                        (c)        history points to what asset class best provides, through economic

and political uncertainty, and high and low inflation

Whilst our clients most often think their financial adviser’s role is to predict, unfortunately we cannot.  But more importantly no-one can.  What we do know is what the markets have always done and over what time periods.

The basis of advice from FoxPlan will never be predictive.  Our objective will always be to provide the greatest probability for our clients to achieve their designated plan – and thus the portfolio will be so designed.  Adjusted if the plans change, not if external factors make a noise in the short term.