BY TONI MEADOWS, CIO, OMNIS INVESTMENTS
The hunt for the new ‘polymer’ £10 note may excite some, but if you’ve kept your cash close to your pocket in the past decade then you’ve missed out on some stellar returns.
Here we will talk about company shares, otherwise known as equities. If you had bought into the UK’s primary equity index, the FTSE 100, at its lows in March 2009 – in the wake of the global financial crisis – and held your nerve, you could have made a return of over 180% today.
The trick of course is get to get the right balance. Just as you have missed out if you stuck your money under the mattress, or even in a low-yielding high street bank account, it’s also a bad idea to have all your wealth invested stocks and shares, and risk losing a hefty amount should markets take a turn for the worst.
The trick is to invest a sensible amount in these risk assets, and to stay invested for the long term. JP Morgan Asset Management published compelling research on the impact of being in or out of the preeminent US stock market index, the S&P 500, over a 20-year period.
The conclusion? It appears that most investors are poor at predicting short-term movements in the market. While a fully invested $10,000 investment in S&P 500 on 1 January 1997 would have been worth $43,933 by 30 December 2016, many of those who traded during that time would have a much smaller pot.
Unfortunately, investors are often spooked by downward turns in the market and sell at a low point, and miss out on subsequent rebounds in prices which can often happen very quickly.
Indeed, the research found that six of the 10 ‘best’ trading days occurred within just two weeks of the 10 worst days. For example, the best day for the market in 2015 – 26 August – was only two days after the worst day on 24 August.
If you missed out on the 10 best days for the market over the past 20 years, your $10,000 would be worth $21,925, around half of what you could have made had you stayed invested.
Investing for the long term then, and not worrying so much about the noise around the bad days for the markets is a proven strategy. An equally important lesson to learn is the value of being invested in the first place – after all, both dollar figures highlighted are still a whole lot more than what you would have made keeping your money in cash!
The power of compounding
What long-term investors are benefiting from here is the power of what is called compounding. This is the snowball effect that happens when your earnings generate even more earnings. So, as those stocks you own pay income through dividends, letting the fund manager reinvest those proceeds means they are added to the pot and so the money that you accumulate can grow faster and faster as the years roll on.
This holds true across major stock markets, which is one of the reasons why the Omnis Managed Portfolio Service diversifies its choices across multiple countries; we use a selection of regional specialist funds.
By holding a suite of funds in one risk-rated portfolio, managed daily through ‘tactical’ asset allocation, it means we can smooth out returns when markets move in different directions. For your wealth to beat inflation, you must invest, and stay invested!
Omnis Investments does not provide investment advice. This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments. Any opinions expressed are made as at the date of publication but subject to change. Information obtained from external sources is believed to be reliable but its accuracy is not guaranteed.