Staying invested – Investors’ Chronicle
Last month saw noticeable market swings. We are set for more volatility. Under such circumstances, it is easy for investors to be shaken loose – to liquidate positions for fear of losing money or in the hope of getting back in at a lower price. But evidence suggests that trying to time market swings is not conducive to successful long-term investment.
Furthermore, such an approach contrasts with the philosophy behind both portfolios. From the start, certain fundamental principles have guided these portfolios: keeping it simple and cheap, reinvesting dividends, diversification and regular rebalancing are key among them. But so is the principle of staying invested and embracing market volatility.
History is on your side
Wiser investors than I can and do take advantage of short-term market swings. A small number of managers are consistently good at it. But for the majority of investors, history suggests it is better to stay invested.
A study from Barclays Wealth a few years ago highlighted that UK investors were losing around 1 per cent a year because of market timing errors. Indeed, from 1992-2009, investors who tried to time the market were down 20 per cent compared with those who had stayed invested.
The more volatile the markets, the more scope to get market timing wrong – and therefore the greater the loss. Investors dealing in the more volatile global equity markets apparently lost over 2 per cent a year, for this very reason.
Research from Fidelity confirms the wisdom of sticking with the markets. Investors who put £1,000 into the FTSE All-Share in October 2000 would have seen it grow to £1,330 by October 2010 – not a good decade by historical standards! But had the best 10 trading days been missed, then the return would have almost halved to £720. Missing the best 20 days would have reduced the return to just £475.
Now some would say that you would have to be very unlucky for this to happen. But it is more common than realised. Evidence from unit trust managers suggests retail investors have a tendency to buy when the market has risen, and to sell when it has fallen. Indeed, investors sit on the sidelines for some time after markets have retreated.
This is easy to criticise with the benefit of hindsight, but difficult to counter at the time. Yet it is precisely at these moments – when sentiment has hit rock bottom, and the bad news is in the price – that markets tend to bounce by some measure.
It is worth remembering that the single best trading day over the past 10-15 years occurred when the FTSE All-Share rose 9.2 per cent on 24 November 2008 – amidst the ballooning credit crisis and when investor sentiment was probably rock bottom!
Advisors suggest investors should therefore reverse their normal behaviour and buy low and sell high. In other words, buy the future and not the past. But this is easier said than done, particularly when all hell is breaking loose around you.
Instead, and until the time the attainment of investment goals is approaching, investors should simply stick with the market and ignore the small talk and chatter of the markets. Market timing is a mug’s game and, unless you are one of the gifted few, best to be avoided.
Treat the market with respect and approach with humility. If you stay loyal, it will reward; but stray, and it will punish.
Portfolio changes
With this in mind, I have invested available cash during the dark days of May. In both portfolios, I have added to existing holdings of Standard Life Property Income Trust (SLI) despite commercial property being out of favour at the moment.
Speaking with its manager, Jason Baggely, SLI has particularly suffered of late partly because the portfolio’s average lease is shorter than the industry norm – around six years compared with 10. This is seen as higher risk as the portfolio is more vulnerable to tenants moving on. A 12 per cent void rate – the highest it has ever been – created by one key tenant running into difficulties has also not helped sentiment.
Both net asset value (NAV) and price have therefore declined and today stand around par. But I think this is a mistake. Jason’s focus on quality means he has a good track record of tenants staying on. Moving is time consuming and costly – important considerations in these difficult economic times. Meanwhile, Jason is working to reduce the void rate – and some of this does include refurbishment, which should be considered a positive.
After its recent decline, SLI is now offering investors a yield in excess of 8 per cent – which in itself is reinforced by revenue reserves exceeding one year’s dividend. As the economy muddles on and interest rates remain low for some time to come, I believe sentiment will catch up with the fundamentals – and investors will latch on to the generous income stream.
Furthermore, adding to SLI serves another purpose. Having added to both portfolios’ higher yielding corporate bond exposure of late after strong runs in the equity markets, increasing exposure to commercial property is a useful way of both modestly rebalancing and diversifying the portfolios.
Meanwhile, within the Growth portfolio, I have introduced Throgmorton Trust (THRG) which is run by the well-respected team of Mike Prentis and Richard Plackett at BlackRock.
Mike invests in small and mid-cap stocks – with around a quarter of the portfolio invested in the Alternative Investment Market (Aim). But Richard also uses contracts for difference (CFDs) to manage risk and to take advantage of shares that are considered expensive – modest positions in mid-cap stocks being the norm. Exposure to CFDs is limited to 30 per cent of the gross asset value of the investment portfolio.
This somewhat unusual brief, together with a high performance fee, has put some investors off. Again, I suggest this is a mistake. A focus on good quality companies with exposure to strong overseas markets, the flexibility to short companies and a strong team has resulted in an excellent track record since they took over the trust in 2008.
It also has a policy of needing to claw back any underperformance of its benchmark in one year, and then having to beat the index in the following year, before it can charge a performance fee. Furthermore, its good track record is despite the fact that the Aim market has performed badly of late. A 16 per cent discount to NAV therefore makes this an attractive addition to the growth portfolio.
Otherwise, there were no sales in either portfolio.
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