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Investing in stagnant markets

In a world of low- long-term returns, investors must pay more attention to market timing.
Investing in stagnant markets
  • The dividend yield points to low long-term returns on equities.
  • There's a lot we can do to mitigate this problem, such as not being a buy-and-hold investor.  

We should prepare ourselves for years of low returns – and one way to do this is to take market timing more seriously.

One way to see the problem is to recall that the dividend yield on the All-Share index has for years been a great predictor of longer-term returns. With the yield now well below its long-term average, at 2.8 per cent, it is pointing to tough times for equities. Post-1986 relationships predict total returns on the All-Share index after inflation of only 0.6 per cent a year for the next five years. That implies a capital loss in real terms: all the returns will come from yield.

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