Equities are just far too risky

Not like you

Stretching it a bit there, <!--EZCODE ITALIC START--> Oh Founder<!--EZCODE ITALIC END-->.:\

Mortgaging to buy a holiday home (or own residence) is quite irrelevant to the debate, no less so than borrowing to buy a car.

Mortgaging to buy an investment property - yes that is ostensibly comparable, as it is an investment decision. Yet, given the lumpy nature of property investment the usual reason for gearing is to get critical mass and diversification from a relatively small outlay. Also since short term property returns are so less transparent and volatile than equity returns, property investment is more compatible with taking a long term geared position, at least on the nerves.

Now mortgaging to invest in equities is in a league of its own. Gearing is not needed for critical mass as you have often pointed out - a relatively small outlay can get the necessary diversification. This is pure gambling!!

Isn't it really ironic that a bank should advise you to borrow to invest in equities. Who is going to do the lending? Why, the bank, of course. If borrowing to invest in equities is such a "no brainer" why do banks lend money at all, why not simply bypass the individual and themselves invest directly in equities?

<!--EZCODE ITALIC START--> Oh Founder<!--EZCODE ITALIC END-->, it really isn't acceptable that the Equity Cultists, of which you are clearly one of the most fanatical, have no accountability whatsoever for their blind faith. When things go wrong (and boy have they gone wrong!) they always point out to the long term. This is beginning to sound like "you will get your reward in heaven", a familiar mantra of other cults.

Clearly BoI, in giving that pretty outrageous advice six months' ago, were convinced that equities had bottomed out. One presumes they were also fairly convinced that the six months would see an upswing. They got that wrong <!--EZCODE BOLD START--> in spades<!--EZCODE BOLD END-->.:rolleyes

Re: Not like you

Hi Hawkwing

I see that you are treating me with the respect I deserve. Don't worry, I don't mind!

There is no mad outcry about the huge amounts of money being borrowed to invest in property. It is often 100% gearing and few seem to appreciate the risk involved. If property was revalued every day, the way equities are, I think the volatility of individual properties would be a bit more transparent.

Likewise, if equities were valued only every 5 years, they would appear a lot less volatile.

There is nothing inherently wrong with borrowing to invest in equities, if you can service your borrowings and if you have a long term perspective. If you did it last year, you could be down 30% or more just now. But, most of the time, this strategy will work well.

Coming back to the individual case, we don't know what percentage of his house he was advised to borrow and we don't know what proportion of his income the repayments would have been.

I generally would advise against borrowing to invest in equities and I disagree with the advice given by Bank of Ireland, but it's not terrible.

Brendan

The time is right???

Crystal ball gazing time.

Is the time now right to get back into equities? Have the markets bottomed out? Or are they just taking a temporary respite on their headlong rush to oblivion? Or am I just crazy trying to time the markets?

Answers on a postcard please.....

Homer

Re: The time is right???

There is a good piece by Patrick O'Sullivan in today's Indo entitled Get Into Equities for the Long Term. The author is a senior economist with Bank of Ireland Private Banking.

It is a good summary of the numbers and stats:
The S&P has fallen by 40%
The Eurostoxx by 50%
The ISEQ by 35%

The prospective p/e ratio for S&P is 17
The prospective p/e ratio for Eurostoxx is 16

The average p/e ratio fo the S&P is 15. According to Siegel, the the p/e ratio for the S&P should be around 20 given low transaction costs, low inflation, higher productivity and more favourable tax regime.

The Federal Reserve has a model which indicates that the market is between 15% and 30% undervalued.

On the other hand.....

Alternatively, you could choose to believe this guy...

ftyourmoney.ft.com/servlet/ContentServer?pagename=FT/FTym/FTyourmoneyRender&inifile=
futuretense.ini&c=
StoryFTYM&cid=1028186154944&ExpIgnore=true

prospective

The Key word here is prospective. That is projected, future etc. The traditional measure is the trailing P/E which for the s and P is over 30. In otherwords there are very rosy projections for earnings growth for 03. let's hope they come true. Otherwise look out below.

Re: prospective

Hi Copernicus

I don't see any conflict between what Prof Marsh says and what Patrick O'Sullivan says?

In the article by O'Sullivan, he points out that "...just because equity prices have fallen does not necessarily mean that they are cheap..." and "...the short term outlook for equity markets remains couded..."

Hi tyoung

If the trailing p/e is 30 and the prospective is 17, does that mean that profits are projected to almost double over the two periods?

Brendan

A little Humility, Please

I think a little humility and apology from the fanatical equity cultists would be in order at this point of time.

By any standards or measure anyone who advised investing in equities over the last year or two has been proved disastrously wrong.

The Fed telling us they have a model which shows equities are underpriced is like Hibernian telling us that they have a model showing Celebration Bond is a winner. The vested interest in either scenario is so pronounced as to totally undermine any findings.

If the Fed think equities are such a good buy why have they forced interest rates down to such ludicrously low levels to try and stimulate economic activity?

Japan has just touched a 20 year low. US, UK and Europe are touching 5 year lows. Another 15 years or more before we bottom out?:rolleyes

prospective earnings

Brendan
Basically yes. Coincidentally Ft's Lex had a piece on this issue on Fri. Here's the link.
news.ft.com/lex
If earnings come in at or close to projections, US stocks are reasonable value. If not, there's more downside ahead. Personally I wonder how real these projections are. I think analysts are privately cutting projected EPS(hence the recent market slide). They just haven't got round to doing so publically.
I feel more comfortable with the Irish and UK markets. Valuations and expectations are lower. Of course if the US falls they are likely to follow in the shortterm. Longerterm I think value will win out.
Hawkring
In Brendan's defence, he was very public and very early in calling the whole technology bubble and warning about overvaluation in the US market. If people had followed his advice in 1999 they would have avoided the extreme losses technology investors have suffered.
And don't forget all bear markets end. In my opinion, you should be upping your equity exposure.

Regards

Media Watch

I see it again, Merrion stockbrokers in the Sunday papers have come to the view, surprise surprise, that a carefully selected basket of equities (which they proceed to name) is just the ticket at this point of time.

When oh When will some regulator insist on the following regulations?:

(1) Stockbrokers, no more than anybody else, haven't a bull's notion what is a good equity investment and should immediately stop pretending anything different (unless they have insider information, in which case they should be jailed for abusing it).

(2) Stockbrokers have a very very strong vested interest in promoting an appetite for equities and so their advice is hopelessly compromised and again they should be banned from making such advice.

(3) There is a very strong possibility that a stockbroker has an even more direct vested interest in recommending a particular equity either because that company is already a client or because it wishes to ingratiate itself with a view to a future client relationship.

In short, why doesn't the CB ban stockbrokers giving any specific investment advice because (a) (short of illegal insider info) they haven't a clue and (b) they have a hopelesly vested bias towards giving bullish advice.