Trade wars between the US and China, as well as Brexit and tensions in various parts of the world have all made markets more volatile in recent months. Unsurprisingly, private investors have become more nervous.
A recent survey by leading investment house Schroders revealed that almost three-quarters of UK investors said they were influenced by political developments and market movements and checked their investments at least monthly. Nearly one in five investors said that they were waiting for the dust to settle before making investment decisions.
So is it the wisest choice to allow political uncertainties and market swings to colour your investment judgements?
Five Year Plans
Most investment experts agree that five years is the minimum period that an investor should expect to hold share or bond-based funds. And the longer the holding period, the more likely it is that funds invested in shares will outperform cash deposits or bonds – although there is no certainty that this will happen.
Over five years or more, most of the headline grabbing news normally fades away or is overtaken by other events. The value of taking a longer-term approach is well illustrated in the table on page 5 from the latest Barclays Equity Gilt Study, published earlier this year. This shows the probability of UK shares outperforming UK government bonds (gilts) and cash (as measured by Treasury Bills) over various consecutive periods between two and ten years, based on real data tracking between 1900 and the end of 2018.
For example, UK shares outperformed cash deposits in nearly three-quarters (73%) of four-year periods over the 118 years; and shares outperformed cash in over nine out of ten periods of ten years.
Just over the past five-year period from the start of 2014 to the end of 2018, the UK experienced two general elections, two referendums, the resignation of a prime minister and the arrival of Donald Trump in the White House. Despite all these upheavals, investors in UK shares who stayed the course received an overall return of 22.2% against just 1.8% from cash. Adjusting for inflation shares were 8.4% ahead over those five years, while cash lost 9.4% of its buying power.
The Right Days
Of course, stock markets can fall and sometimes they can drop very quickly. But the rebounds from falls can also happen quickly and are likewise hard to predict. A very small number of days have historically generated a surprisingly large proportion of total long-term returns. Over the last 30 years to 2018, about 0.2% of days generate roughly half of total performance.
So if you come out of the market, you could be missing out on key growth moments. For example, the US stock market as represented by the S&P 500 index of large companies had an overall market return of 1,000% over the 30 years to 2018. Removing the 10 best days would halve the performance to just 500%. It is a similar story with the European Stoxx 600 – the less stellar long-term performance of a 470% increase over 30 years would have been halved by leaving out the 10 best days on which the market moved upwards the most.
Ignoring the short-term noise in favour of paying attention to longer-term developments has two other benefits:
- Your investment turnover will be lower, reducing overall costs; and
- You can stop worrying unnecessarily about the daily changes in investment values.
The value of your investments, and the income from them, can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
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