Keep calm and carry on
For the best part of 10 years market linked investments have provided healthy returns. It is inevitable that at some point markets will wobble and the press will be filled with dire warnings of impending doom. At such times it can be tempting to sell everything for the apparent safe harbour of cash. But markets recover, often quite quickly, meaning you could easily miss any bounce back. Indeed, if you missed just the ten best days in the market over the past 20 years you would have lost 170% of your returns.
The best approach is to ensure you construct a tax efficient diversified portfolio, which is “rebalanced” regularly (to ensure its constituent parts stay in their optimum proportions given your risk tolerance and objectives), and when the market takes a downturn, “keep calm and carry on” – stay invested. It is time in the market which really drives long term returns, not timing the market – the latter is impossible.
Blood On The Streets
In fact, you could go one stage further and adopt the approach of Baron Rothschild, an 18th century member of the Rothschild banking family, who is famously quoted as saying: “The time to buy is when there is blood on the streets”. While the quote may seem extreme, the sentiment is valid. Going against the crowd (the market) and being a “contrarian” investor can enhance investment returns over the longer term. Buying out of favour stocks and selling them when back in vogue is an investment approach which has proven its worth.
While most of us neither have the time nor inclination to research and identify possible stocks to invest in using this approach, the same objective can be achieved by investing in a “recovery” fund where a professional investment manager seeks to invest your money with the same ethos. By investing in a recovery fund you effectively invest in a number of such stocks and therefore automatically achieve a degree of diversification (not putting all your eggs in one basket).
Keeping Calm With Recovery Funds
One such recovery fund was launched in May 1969. This was quite a wonderful month, notable not only as this was when this fund came into being, but also when I came into being. If £1,000 was deposited in May 1969 in a building society account it would have grown to £10,658; however, just to keep up with inflation it would have needed to grow to £15,487. If invested in the stock market (FTSE All-share index) the £1,000 would have grown to £126,468. But if invested in the aforementioned recovery fund it would have grown to £568,267.
So you can see, sometimes swimming against the tide can be smart, but you have to be patient and invest for the long term, ideally at least over the course of an economic cycle – 8 to 10 years. Are you brave enough to be a contrarian investor? Fortune favours the brave.
Author: Paul Newton FPFS, Certs PFS (DM & Securities), Certs CII (MP & ER), STEP Affiliate, Cert PMI is a Chartered Financial Planner for Castlegate Financial Management Limited, a firm of Independent Financial Advisers, authorised and regulated by the Financial Conduct Authority. 8 Castlegate Grantham Lincolnshire. 01476 591022. This article is for information purposes only and does not constitute financial advice which should be sought before any action taken. The value of investments and the income from them can fall as well as rise and is not guaranteed which means you could get back less than you invest. Past performance is not a guide to future performance.