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Why investors must focus on long-term goals in the face of market volatility

07 April 2016

Guy Stephens, managing director at Rowan Dartington Signature, explains why investors should recognise the long-term attractions of equity markets despite the current volatility.

By Guy Stephens,

Rowan Dartington Signature

The barrage of media reporting that is available nowadays can quickly overwhelm the investor into a sense of panic and hysteria if not put into context.

As the EU Referendum rumbles on, that is causing consternation with many investors who prefer the safety of cash for the time being.  In addition, the attention lurch from one scandal to the next with this week’s big story being the leaking of tax haven client information. 

It does appear that the whole world is corrupt these days and the poor old investor has to be very careful who he trusts and what he does with his hard earned cash.

Performance of index in 2016

 

Source: FE Analytics

It is very easy to become consumed with fear and remain in cash but this confuses what an investment portfolio is composed of.  It is not a collection of options dependant on the outcome of the Brexit vote, nor is it a portfolio of securities dependent on the extent of the Chinese economic slowdown, the outcome of the Port Talbot steelworks negotiations, the level of the oil price or when and if the US raises interest rates.  

However, the private investor could be forgiven for thinking so as these negative stories have been dominating the news for some time now.

There are usually four main asset classes in a portfolio; equities, bonds, alternatives and cash. 

All of the equities are connected to underlying businesses which are affected by the big macro picture to some extent but are held for reasons of their profitability, cash-flow, dividend and balance sheet, and the underlying growth potential and quality of their business model. 


 

The same follows for overseas equity collective funds where the fund manager conducts research into his company universe and selects those he feels have the best potential for future success whether that be profits or dividend growth.

Considering the robust economic growth in the US and the UK and sluggish but positive in Europe, with the consumer enriched through low fuel prices, all is not necessarily as dire as the newswires may have us think.

In the UK, the private investor tends to follow the FTSE 100 which has failed to advance beyond 7,000 ever since the end of the millennium and currently sits  around 11 per cent below this level, having dipped to a level over 20% below during February. 

A focus on the negative environment as reported in the news affects private investors and leads them to look at alternatives such as property which has provided inferior returns and exhibits considerably lower liquidity. The equity market may be more volatile but if held over the long term, with income reinvested, it outperforms all mainstream asset classes.

Price performance and total return of index since December 1999

 

Source: FE Analytics

To put this in context, without income reinvested, the FTSE-100 is around 11 per cent lower than the peak of 6,930 reached on 31 December 1999 in capital terms. However, with income reinvested, it is over 70 per cent higher.  Investors often find this incredulous or fail completely to appreciate the power of compounding with respect to dividend income over time.  This is all the more relevant when we consider that the FTSE 100 has actually been one of the poorer performing equity markets in which we can invest.


 

The more dynamic areas of the FTSE 250 have risen three fold since the millennium, the currently unloved Emerging Markets by 2.75 times, Asia-Pacific using the Hang Seng index as a proxy by 1.5 times and the UK Small Cap and S&P 500 have doubled, rising by 110 per cent.  Even the relative basket cases of Europe and Japan are up by 68 per cent and 25 per cent respectively.

Performance of indices since January 2000

 

Source: FE Analytics

So, it is vitally important when seeking investment opportunities to recognise the long-term attractions of equity markets without getting overwhelmed with all the barrage of negative stories and remaining in cash.

Of course, it is very important that a coherent investment strategy is employed to exploit these opportunities outside of the headline indices and this is where a professional investment manager comes in. 

Our philosophy at Rowan Dartington is one of not taking any more risk than clients need to in order to generate the returns that they require.  Returns relative to an index benchmark are okay up to a point, but the most important benchmarks are the goals of the client whether that is a secure and growing income, a steady accumulation of capital, or a mixture of the two.

Standing back from the negative news flow and focusing on the fundamentals can provide a much needed reality check before the madness of crowd hysteria takes over.

 

Guy Stephens is managing director at Rowan Dartington Signature. All the views expressed above are his own and shouldn’t be taken as investment advice.
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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.