Taking the long term view
IF you open any financial newspaper or read any of the market commentators the chances are they will be focussed on the short term.
As investment managers we are now obliged to produce valuations every three months according to the regulations. There is of course, nothing wrong in keeping clients well informed - just the opposite – but it does mean that there is more emphasis on short term performance.
It is easy to lose sight of the fact that equities in particular are very much long term investment instruments and some of the best results come from buying, holding and reinvesting income. This is something that is emphasised to potential new clients: equities are for the long term, which generally means a minimum of five years. In many ways this is a reflection of everyday life. The days of saving up for purchases are largely gone with such easy access to credit, so that consumers can acquire what they want when they want it and not when they can afford it. Quick profits are hard to come by (and even harder to realise), but nevertheless the myth persists that they are attainable.
Over the past twenty years we have seen a great disparity in the performance of the different markets around the world. In purely capital terms, £1,000 invested in the S&P 500 would now be worth almost triple the initial investment, £2,865, whereas the same amount invested in the FTSE All-Share index would be worth £1,870. Similarly the European index would now be worth £1,656. Thus despite the political upheavals and world-changing events, the world's largest economy has produced the best investment returns. Over the past 25 years, much of this has of course been influenced by the tremendous growth in the US tech industry and the ability to turn ideas into viable businesses. It is also a lesson as to what really influences the stock markets. Political events are important, but it is really economic fundamentals that matter: the economic growth of the US has decidedly outperformed that of the UK and predictions indicate that this is set to continue.
It is, then, asset allocation that plays such a big role. Traditionally investors here have concentrated on the UK, with the thinking being that one should hold assets in the same country as one's liabilities. Clearly this has not always been the best investment policy in terms of capital growth, but there are other factors which come into play. Income, for example has played a very significant role in the UK stock market. We have experienced a low-interest era for a prolonged period – a very rare phenomenon in the modern investment era – and some equities have provided a welcome return over the long term compared with other assets such as cash and government bonds.
It has been a tricky time in the markets recently: it is even harder to predict their future direction. Fundamental investment principles remain unchanged: equities are long term instruments which are highly sensitive to the business environment.
:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.