I signed off last month’s column by indicating that I would talk this month about how stock markets have performed historically, after periods of heavy discounting and associated volatility. Before I go on to this subject, it’s worthwhile reminding readers that the first objectives of wealth creation or maintenance are to resolve the two core components of long-term wealth erosion. These are of course Tax and Inflation.
Don’t forget this is France with respect to the first of these, so any decisions made in respect of this must take that into account. Depositing money on short-term, high interest bearing accounts in the UK or elsewhere might seem like the thing to do for many of you right now. However, the gains will be taxed at source at either 20% or 40% dependent on your UK tax band, or you can choose to be taxed here in France at the source rate of 16% + the 11% social charges. An alternative in France, is to choose to declare the gain as part of your tax return here, if your marginal rate is lower than 16%, but the 11% social charges will still apply.
Back to the Markets?
Most stock market indices have tumbled this year. The S&P 500 Index, which is a combination of 500 of the US’ largest companies, is seen as a bell weather of the US economy. The current correction hit its lowest point on October 10, 2008, with the S&P 500 Index closing 46.7% below its October 11, 2007 peak.
The dismal performance of the last year has helped to pull down long-term returns as well. The 10-year annualized total returns for the S&P 500 for the period ending September, 2008 is 3.4% – significantly below the 10% historical average (80 years) that is often used as a benchmark for long-term equity performance. It’s ugly enough to make some people question the soundness of equity investing.
However, low returns for trailing 10-year periods have actually been a bullish indicator for future long-term periods. (To make the analysis simple, I’ll use 10-year periods ending on December 31 as my sample.) Since 1940 there have been six 10-year periods that produced annualized total returns below 5%. The following 10-year periods averaged 15.2%. At this rate money quadruples in 10 years. Each of these six 10-year periods had annualized returns in excess of 12.7%.
| Poor perfomance | has been | followed by | Strong performance | |
| 10-years | Annualised | 10-years | Annualised | |
| ending | returns | ending | returns | |
| 1940 | 0.8% | 1950 | 12.7% | |
| 1946 | 3.6% | 1956 | 18.4% | |
| 1974 | 1.3% | 1984 | 14.6% | |
| 1975 | 3.3% | 1985 | 14.1% | |
| 1977 | 3.7% | 1987 | 15.1% | |
| 1978 | 3.2% | 1988 | 16.1% |
The conclusion is that poor performing long-term periods have been followed by strong performing long-term periods. The same can be said of the other leading market indices. Of course, the average inflation rate for the last 10 year period analysed above was 2.95% and then there’s tax to be taken into account.
So there may be an opportunity to catch the next 10 year rise, should the pattern follow. With the use of Assurance Vie you can not only spread your investment risk across the market, defend against currency fluctuation, but crucially enjoy the benefits of no tax on investments held within the policy…oh and there’s access to capital protection of up to 80% of the highest level your investment attains.
New ways to keep up to date on Tax and Finance in 66
I am now publishing my 66 column as a free monthly newsletter, which you can receive by email. I am also, if there is sufficient interest prepared to give a no obligation tax and financial advice seminar, for which the charge will be nominal to cover refreshments. Places will be limited. For those interested in either or both please send an email to me at.waddell@spectrum-
ifa.com, with “seminar”, “newsletter” or both in the subject line.
Spectrum does not charge clients for advice given, which is independent, regulated and indemnified.
Call Martin on 06 43 63 68 63 for your free, no obligation financial review or mortgage application.
