Don’t let short term distress cloud long term vision
The economic system works and has provided positive returns over cash over time. Investors simply receive a higher return for taking on the risk or volatility of equity investment. However, investor behaviour is tainted irrationally by what is happening in the local market. For example here in the UK the Chancellor in the recent budget had to cope with the loss of coveted AAA status for UK debt, a possible third dip to the recession, slashed growth forecasts and lack of progress or policy in stimulating growth.
This all sounds quite worrying for the UK economy and living and working in the UK we feel the pain of the economic recovery in many ways. However, this does not translate to our investment clients simply because of diversification. Holding an internationally diversified portfolio means that the impact of any one country is reduced on the overall performance as each country is at a different stage of their economic cycle.
Life can feel quite volatile and scary for investors in the short term simply because markets do a good job of pricing in the bad news as soon as it is expected. This can lead to anomalous situations like now in the UK where the economic news is bad and priced into the market months ago but stock market performance is good. This further reinforces our insistence that clients take a long term (5 year plus) view when investing in equities. Even though our chancellor is seen as one of the most influential finance ministers in the world with a budget of £700 billion, his relatively short tenure in No 11 might not make much of a difference to an investor with a sensibly long term time horizon.
There is some interesting research done by Dimensional Fund Managers which points out that between 1971 and 2008 the average market return from high growth countries was practically the same as the return from low growth countries. The supposition is that investors still require the same premium return for taking more risk. Stock markets do not always move in tandem with each other and underlying economic growth. For example, in 2011 the US stock market was only one of three G20 countries to show a positive return and the US economy grew by 1.7%. In contrast the Chinese stock market fell by 22% whilst their economic growth was 9.3%.
Lessons learned
- It is futile to try and time entry and exit in the stock market
- It is crucial to hold a globally diversified portfolio of investments
- Equity investment is only for those with a long term, 5 year plus time horizon
- What is happening in your local economy is not what is happening elsewhere and so don’t let this influence your investment behaviour
Andy Parker
Chartered Financial Planner, Birmingham