How doing nothing can increase your investment returns
“It never was my thinking that made the big money for me. It always was my sitting…. My sitting tight!” – attributed to Jesse Livermore in Reminiscences of a Stock Operator (1923) by Edwin Lefèvre.
There are plenty of worries in the world to scare investors at present. Can economies stand increasing US interest rates? Will President Trump’s promised tax reforms be as positive for business as assumed? What will be the impact of the UK’s exit from the EU? There is also the subject of valuations. By some metrics shares look expensive, and government bonds certainly appear richly priced.
Yet returns have been strong for investors who have sat tight against much negative commentary in recent years. It is always easy to find a reason to do something to your portfolio, to take profits or even to sell up. Many column inches are devoted to urging investor caution – this tends to make for a better story – but doing nothing has been the right approach.
When to worry
There still seems to be a healthy scepticism among investors at present. Understandably, as the political and economic environment is highly uncertain. Yet it’s actually when everything looks set fair and there appears to be a smooth ride ahead that we should generally start to worry. This is when valuations tend to be at their most stretched.
Events that derail markets tend to arrive unannounced, predicted by very few. If it’s being talked about it’s probably reflected in prices anyway. It’s the “unknown unknowns” rather than the” known unknowns” we should worry about, but therein lies the problem: if we don’t know what they are or when they might strike we can’t quantify their impact. There is of course the more positive view that unknown unknowns might offer nice surprises too!
Get into a good habit
Predicting the direction of stock markets and everything that goes with it (economics, politics, currencies, demographics, and so on…) can be useful at times but it often seems to be a fool’s errand. Even having an edge in any of these spheres of knowledge may not translate to prescient views concerning markets. The economy and markets can move in different directions.
Instead it’s often best to simply make regular investing a habit and keep your money invested rather than chopping and changing. This inactivity isn't laziness. It’s a conscious decision that micromanaging or trading in and out of assets tends to achieve little in the long run. It’s also an admission the emotions get in the way of sensible decision making. An investor’s biggest asset is time. Riding the inevitable ups and downs of investing in the stock market (or other assets with risk attached) is often the best policy – especially when investing in assets that produce income. To sell out with a view to buying back in later interrupts the flow of income – be it dividends from shares, interest from bonds or rent from property – and this usually forms a large component of investment returns.
It is also worth remembering that if you do sell you tend to have to make two decisions – when to sell and when to buy back in. Even if you time the former right, the latter could catch you out if your chosen asset rebounds more quickly than you expected.
Build your foundations
Clearly, though, to be inactive your portfolio needs to be well constructed in the first place. Diversification (spreading you money between different areas and asset classes) can bring strength to a portfolio and smooth out the ups and downs. If one area performs poorly another could be offsetting it, or at least diluting the disappointing returns. A carefully constructed portfolio can offer resilience as well as strong long term performance.
When building a portfolio consider funds rather than individual shares. Funds offer instant diversification in their particular area of investment. Our Foundation Fundlist of investment ideas and our Foundation Portfolios can offer a starting point. Monitoring and, if necessary, rebalancing is easier with a handful of funds than with dozens of individual shareholdings.
If deciding on a balanced portfolio (and monitoring and rebalancing it) seems like hard work you could consider a ‘ready-made’ portfolio in the form of a multi-asset fund that spans a range of geographies and asset classes. For instance, Charles Stanley Multi Asset Funds draw on the wealth of experience of Charles Stanley’s equity, bond and fund research teams to offer diversified portfolios in a single investment.
It is possible to select from one of five funds, each designed to meet a specific risk profile and targeted level of return – and then let the professionals do the job of portfolio management. However, please remember all investments can fall as well as rise in value.
This article is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investors should be aware that past performance is not a reliable indicator of future results and that the price of shares and other investments, and the income derived from them, may fall as well as rise and the amount realised may be less than the original sum invested. Investment decisions in collectives should only be made after reading the Key Investor Information Document, Supplemental Information Document and/or Prospectus. If you are unsure of the suitability of your investment please seek professional advice.