Will all the poor bookies please stand up

Recent stock market volatility has brought back memories of the 1987 crash and has been the subject of much media coverage. For some commentators, the turbulence in financial markets has been a warning sign that the bull market may be over, that it is now time to retrench. For others, it has been a much needed correction, slowing, but not stopping, the onward march of the markets.

The Minister for Finance has also entered the fray, on radio earlier last week and, more recently, when addressing the Association of European Journalists on Friday.

Mr McCreevy suggested that taking a position on a stock is the same as backing a horse; the principles are the same - punters look at form; equity investors assess balance sheets.

Missing from this analogy, however, is a differentiation between people who punt - on horses, markets or spiders climbing a wall, and people who are long term investors.

Punters are essentially short term investors. When betting on markets, they may be lucky or unlucky. When betting on horses, they are generally losers in the long term. Will all poor bookies please stand up!

Long term investors - those with an investment horizon of five years plus - are in a very different situation.

Long term equity investors, with a diversified portfolio, have historically achieved consistently higher returns than those available from alternative investments.

Over the past 15 years, for example, equities have delivered annualised returns of around 13 per cent plus inflation.

Pension funds, which will have a very long investment horizon of 2030 years, will be highly invested in equities and gradually moved towards more cautious investments as retirement age approaches.

Without the bias towards equities in the early days, pensioners would have a much diminished income in old age.

The one thing that long term investors should not do is panic over market volatility. It is a fact of life that markets go up and down.

Investors who rode out the 1987 crash, gained handsomely. Those who panicked lost on the double. Perhaps a good analogy is the current booming property market.

Those who are fortunate to have a house don't sell it and move into rented accommodation because they think the price of housing is too high. They continue to live in their houses and ride out the vicissitudes of the property market.

So, should we be bulls or bears, optimistic or cautious?

The bulls argue that the fundamentals of world economies are good. Growth in the developed world is solidly based, with little or no threat of inflation.

This reflects the improved ability of world central bankers, led by Alan Greenspan of the US Federal Reserve, to manage economic growth.

The second element of the bulls' platform relates to demographics; as the developed world's population ages, people are making extra provision for retirement and health care and are investing in equities at an increasing rate.

The bulls are not unduly perturbed by a correction given that market performances this year have been dramatic; the US equity market is up 41 per cent year to date, Europe as a whole is up 33 per cent.

The bears, on the other hand, have a concern that the slow down in the Far East threatens an already ailing Japan and may spill over into the US and Europe.

They feel that profit growth in the mature economies will be undermined by the weakness of the Far Eastern economies and by competitive threats from there.

This would lead, in the bears' view, to a disappointing prospect for earnings growth, threatening the current high valuations of markets. Does the debate between bulls and bears matter to the long term investor who has bought fund management expertise.

I don't believe so. Investors buy fund management expertise precisely because they want experts to deliver the performance returns they require.

In doing so, the investment manager will balance the desirable characteristics of each market to provide the portfolio which will meet their client's requirements.

Gamblers and punters are prepared to lose their own money. Investment managers are not prepared to lose their clients' money.

Ann Fitzgerald is secretary general of the Irish Association of Investment Managers.