My weekly reflection, plus the week’s top links.

Quick! Sell any shares you were foolish enough to buy, hoard gold and government bonds, and avoid paying taxes because Government quangos will only flush your money down the toilet while singing Don’t Cry for Me Argentina.

Heck, if you can’t beat them, join them.

At the start of the year I wrote Britain was booming – a slightly hyperbolic title I admit, but also a deliberately provocative one that turned out to be right. Back then, nobody had anything good to say about the UK economy, and the spectacular rise in share prices in the months prior was blamed on cheap money.

It’s been the same story all year here, in Europe, and in the US, as I’ve chronicled on my Stock Tickle blog (now on hiatus, due to time constraints).

Yet people far prefer to read doom and gloom disaster stories from people who sound wise by not sounding happy.

As I’ve written before, the bear case always sounds smarter. Writers – particularly bloggers and newspaper columnists – can’t tell us enough how the US recovery is a limp-wristed thing that will end in President Obama selling California to the Chinese to make interest payments on the US deficit.

Yet in reality, this is actually on some measures the strongest US recovery for 25 years, as the FT reports:

The current US economic recovery is widely perceived as the weakest ever, syncing with the popular idea of a “new-normal” economy. Although this recovery is not as strong as those of the 1970s, on many metrics its first year anniversary has proven stronger than either of the last two recoveries during the previous 25 years.

Despite a significant slowdown in the second quarter of this year, real GDP growth in the first year of this recovery was 3 per cent compared with first year recovery gains of only 2.6 per cent in 1991 and 1.9 per cent in 2001. Persistent private job creation took 12 months once the recession ended in the early 1990s and it took 21 months after the 2001 recession.

This recovery began producing persistent private job gains only six months after the recession ended. Moreover, in the first 14 months of this recovery, 205,000 jobs have been lost. While this is surely disappointing, it compares with 220,000 and 935,000 cumulative job losses respectively at this point in the 1991 and 2001 recoveries.

Obviously if you’ve not got a job or you fear losing the one you have, things are terrible. But that’s always the case – not just at the end of recessions. Besides, as I’ve stressed many times, unemployment is a lagging indicator.

I’m not blind to the problems. The US house market crash has led to permanent wealth destruction, and we still look overdue a proper correction in the UK. (I rent, but hedge my bets with Lloyds shares). The US is still growing, but more QE is mooted in the US because inflation remains stubbornly low. I’ve been wrong about government bonds all year for the same reason.

Consumer confidence also remains miserable – not surprising perhaps, given the torrent of bad news hurled at them daily through the press and on the Internet.

In reality though, investors make money when they buy companies at cheap prices that go on to do well, not when some bloke in the pub thinks China is a friend not an enemy, or when his sister feels happy enough to buy a buy-to-let property in Torremolinos again.

And corporate profits have been soaring as the global economy has continued to expand. S&P 500 company profits will  be up about 45% in 2010, and are forecast to rise 15% next year.

Companies are so financially sound – and debt is so cheap, due to low interest rates and perma-bearish investors preferring to buy Microsoft bonds with the lowest yields on record, instead of its cheaply rated stock – that they’ve begun to snap each other up like ladies who lunch buying Jimmy Choo’s back in the boom.

None of this puts shares in the bargain basement; on a P/E basis they look good value, but on a capital cost replacement they look a bit expensive.

The time to really snag bargains was last March, at the height of the bearmania. Unfortunately for those who followed the gloomy consensus, such opportunities come once a decade at best.

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I was asked by one of my fellow financial bloggers if I could remember my first time.

“I remember it well, but it’s none of your business!” I said, after the dreamy music and the flashback sequence was over.

Then he clarified that he meant my first time investing.

So I punched him. Sex is one thing, but a man’s first time contemplating the luscious beauty of compound interest? That’s a private matter.

I’m joking, of course – though I’m sure I’m not alone in having found both of my first times somewhat nerve-racking.

In each case I thought I knew what to expect, and in different ways I couldn’t have been more wrong. I’d done a lot of reading beforehand (and looked at a lot of pictures – graphs, I mean!) but both experiences still seemed pretty surreal.

I think it was partly the sense of passing over some threshold.

Yet equally, maybe it was the sense of anti-climax – the realization that this was just the first step on the journey of a lifetime.

Be gentle with me

It’s no easy thing to take cash worth 25% of your good but unspectacular annual income – money you’ve saved the hard way, by not doing all of the fun things your friends have been telling you about for years – and to move it into the stock market.

By 2003, I’d amassed around twice my gross annual income by saving for half a decade or so, and I was ready to redeploy much of it from cash into shares.

Luckily, as teenage advice columns stress about losing your virginity and I’d urge when it comes to starting investing, I choose sensibly and with a time horizon longer than the day after tomorrow.

No wild punts on a tech tiddler for me! I’m pleased to say my first investment was a lump sum purchase of a UK index tracker fund, provided by Legal and General.

Yes, like those faithful teenage sweethearts who promise the world to each other in school before their heads are turned the moment out of sight is out of mind in college, my young heart was pure.

Nowadays I hold variously traded shares, investment trusts, ETFs and VCTs alongside my core index holdings. But to start with, I was a pure index investor. Just like the data says we should be.

What was I thinking?

I’ve got a memory like a sieve – but they say you never forget your first time, and it’s true in my case.

Especially because I kept copious trading notes in those days!

Below is my actual entry from August 2003. You’re seeing an investing obsession finally getting turned into real money after two years of reading up on the subject – and long before I imagined I’d ever blog about it.

31/8/03: I think that we are about to see the market tick up again. I think terrorism is priced into the market, that after three years the worst is over, and that now is a good time to invest, particularly for the long term. I can’t keep writing touchwood, so assume that’s a standing thing for this entire log!

I am going to put the bulk of my money for the next few years in trackers looking at various Indices, but very biased to UK All-share (which includes plenty of international exposure). For the ISA, I will take a few more risks and include some Japan and Far East, and maybe a bit of technology.

I accept total tracker strategy may prove flawed, just because it is only one technique. After five years, I may try something different for a year or two as a hedge. Maybe a high yield portfolio, commercial property, buy-to-let or individual shares. I can’t imagine paying for a managed fund though – the stats are too unanimous.

Finally, there are some who think there’s no point in holding trackers outside of UK Index, due to KISS approach, cheaper dealing costs, and indices tending to follow each other over time. I am not sure what I think about this, but it doesn’t seem right (say you’d been in Japan for 20 years?)

On the other hand, diversification also equals exposure to new risk/mediocrity. But I will be so overweight in the UK that I think some spread is desirable.

Well, there you go – I guess I am a born waffle-writer. Hemingway’s position in the canon is secure.

Also, that was just seven years ago, but it feels like a different era. I think perhaps it always does in the stock market – even though it’s never really different from a longer, cyclic perspective.

Steady as she goes

I still hold the L&G tracker fund today. It’s made a reasonable return.

When I bought it the FTSE All-Share index was about 20% lower than today, so I’ve benefited from the rise in the index over time.

But at least as helpful is the fact that it’s an accumulation fund, which means the All-Share’s dividend income has been automatically reinvested (minus some expenses) over the years to buy new units in the fund.

This steady reinvestment of dividends is a modest method of pound-cost averaging. With the UK market a relatively high-yielder – typically delivering 3 to 4% every year in income – after a few years reinvesting dividend income can add up to a substantial component of your returns.

While I’ve kept hold of this fund, I’ve more generally chopped and changed a lot over the past seven years. Unlike new contributor The Accumulator – who is a sworn low-cost index man – I’m a self-confessed dabbler. I don’t recommend it, but I do it.

Perhaps you’re the same. Everyone sets off with a plan – whether it’s to stick with passive funds, to hunt for the best managers of active funds, or even to try to beat the market by timing or buying individual stocks.

But as George Soros has written in a slightly different context, reflexivity is ever present in investing. Your outcome and the market you experience will change you.

• It was easy to have faith in index funds in the late-1990s, for instance, when shares had gone up fairly steadily for nearly two decades.

• Buying tech shares looked a great idea in 1999, right up until it didn’t.

• More recently, many private investors have made fortunes buy backing oil explorers and mining companies. Others have found buying bonds has delivered better returns in recent years then equities, and with lower volatility.

At any one time, some people think they’ve found the route to riches. They’ll write about it, tell you about it, and drive around flaunting the proceeds of it.

But precious few first loves last a lifetime, and nothing lasts forever in the markets.

Ideally, have a plan and stick to it through thick and thin. Alternatively, stay footloose and fancy free, and don’t mistake a short-term infatuation – with small caps, with bonds, with gold, with whatever – for the big one.

Want to hear more investing debuts? Green Panda Treehouse has written about his first time, while Tom of the Canadian Finance Blog reflects that he should have bought a tracker. Or alternatively, why not share your first time investing with us in the comments below?

Some quick thoughts, then the best links, rounded up and revealed.

Here’s a finding to depress my domestic readers: Britain is now the second worst place to live in Europe, according to uSwitch.

The news is doubly dispiriting. Not only is Britain officially a rubbish place to live, but we can’t even claim the top (bottom) spot, which goes to Ireland!

According to the report:

The UK came 9th out of the 10 European countries in the Index, thanks to high living costs, below average government spending on health and education, short holidays and late retirement.  The Index shows that people in France enjoy the highest quality of life, closely followed by Spain.

People in the UK pay the highest prices for food and diesel, yet the government spends below the European average (as a percentage of GDP) on health and education. We also work longer hours, retire later, receive less annual leave than most of our European counterparts and get less sunshine along the way – not to mention the fact that we can expect to die two years younger than our French counterparts.

The UK no longer has the highest net household income in Europe, after falling behind Ireland, the Netherlands and Denmark. In the past, the relatively high net income in the UK has offset the poor quality of life, but this year net household income it is only around £5,000 above the European average, compared to £10,000 above last year.

Of course, you discover what you measure.

As our annual three week summer ends bitterly (although temptingly sunny looking, as I gaze out of my home office window) and the six-month winter slog begins, I couldn’t bear to live anywhere else in the UK than London. And most of the good reasons why I choose London aren’t measured by this survey.

Still, I can certainly relate to the lack of sun, the expensive alcohol, and the prevalence of tattoos scrawled across over-flabby flesh even here in Central London, where the UK’s last skinny people seek refuge from the fattening, fighting provincials.

But perhaps the most depressing line in the report is this one:

As it stands, people in the UK can expect to work four years longer and die two years younger than their French counterparts.

Are you planning your escape from the rat race, or do you intend to slog to the end with your stoical co-workers?

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