Shillito (pictured) says that the historical performance of equities proves that patience – as well as reinvesting dividends – is the key to success for the long-term investor.
“Historically, if you invest over a reasonable period of time you will see returns,” he said. “To me, it is preposterous that people are advocating anything different.” Shillito’s comments come in light of a poor day for world markets yesterday, which saw the FTSE close 1.4 per cent down, and the Dow Jones fall 2 per cent. Markets also fell across Europe and some parts Asia.
US corporate data has been extremely weak of late, with several top tier companies projecting challenging conditions in the months ahead. Moody's downgrade of certain regions in Spain to junk status has also come as a blow to markets, and it's clear many investors are worried that things might take a turn for the worse.
He acknowledges the vast number of macro headwinds and expects volatility to persist in the short to medium term; however, he thinks it’s counterproductive to react to every bit of economic news.
“If you are investing for your financial future, what happens on a Tuesday will have little consequence,” he said.
“Currently, if you wanted to save money over 12 to 18 months then I would put it in a building society. We are likely to see markets slide a couple of per cent every so often, but I don’t think this should be a big concern.”
“Yes, we have big issues, such as the fiscal cliff in the US and the mountainous debt problem across the world.”
“We live in a precarious financial world, and these worries are not going to go away and neither will the noisemaking on the part of the politicians,” he added.
Shillito’s comments are in direct contrast to FE Alpha Manager James Sullivan, who said in a recent interview with FE Trustnet that talk of “cheap valuations” is worthless, given the unprecendented macro environment.
However, Shillito says private investors have the luxury of a much longer-term investment horizon than fund managers, who more often than not have short-term targets to hit. Sullivan says he wouldn’t invest in anything unless he felt it could make him money in a year – a view shared by fellow FE Alpha Manager Julie Dean.
Shillito highlights data from JP Morgan to support his belief that short-term market dips should be largely ignored.
“Over a 20 year period, if you had invested in pure equities, over any period of time, you would have highs of over 18 per cent and lows of 6 per cent.”
“However, over one year you could have seen highs of 51 per cent and lows of 37 per cent.”
According to FE Analytics, the FTSE 100 has returned 334.41 per cent over a 20 year period.
Performance of index over 20yrs
Source: FE Analytics
Since 1 September 2008 – just days before the Lehman crash – the index is up 23.19 per cent, in spite of the massive losses it sustained in the aftermath of the bank’s collapse. Between September 2008 and March 2009, the FTSE was down 31.08 per cent, according to FE data.
In order to play the markets safely but still make reasonable returns, Shillito recommends investors place more of an emphasis on diversification.
He commented: “We like a multi asset approach. If you invest across a wide range of assets, you should get reasonable returns with a lower level of risk.”
“Historically, equities have outperformed every other asset class but people are a bit tired of hearing this, so this diversified approach is a very good way to invest.”
Shillito is a big fan of FE Alpha Manager David Coombs’ Rathbone Multi Asset Strategic Growth Portfolio.
“I like the fact Coombs doesn’t manag risk according to volatility,” he said. “He embraces volatility and is more bothered about the correlation of his holdings.”
In a recent interview with FE Trustnet, Coombs said the reason he has ditched all of his exposure to gold is because the asset is too correlated to equity markets.