SLEEPY HOLLOW

The Rip Van Winkle approach to investing

Fed up with volatile markets? Struggling to keep up with ever changing investment advice? If so, it’s time to meet an investment guru whose approach seldom fails. He neither piles in at the top nor succumbs to doom-laden panic. He rides the stock market’s ups and downs with equanimity. And he’s made a fortune, turning modest lump sum investments and small regular savings plans into very large sums indeed.

It’s time for this unsung hero to step into the limelight and be accorded the recognition he’s long overdue. So let’s hear it for Rip Van Winkle, the ace investor who’s slept through every period of stock market panic, trauma and turmoil and come up trumps. His approach is simple, time-tested and can be adopted by anyone. You don’t need to watch the market every day, follow a complicated investment strategy or hang on the every word of some jargon-spouting guru.

Anyone can follow his strategy. There’s no frenetic jumping from one asset to another, no obsessive worrying over sector rotation and no anxious bursts of buying and selling every time the market turns sharply up or down. In fact, he can be called the world’s greatest passive investor. Except for this: he’s more passive than even the most passive investment fund.

The legend of Rip Van Winkle is familiar enough. This fictional character lived in a village at the foot of New York’s Catskill Mountains. Kindly Mr Winkle, popular with his neighbours, did have a weakness: he shirked hard work and his home, and farm, was apt to fall into disarray.

One autumn day, to escape his wife’s nagging, he wanders into the mountains where he meets some old bearded men who offer him a refreshing drink. But Rip Van Winkle soon falls fast asleep.

When he awakes, it is to a world of shocking changes. His beard has grown a foot long and he recognises no-one in the village. He discovers that his wife has died and that his close friends have fallen in a war or moved away. Furthermore, he is disturbed to find another man called Rip Van Winkle. It is his grown-up son. Rip learns he has been asleep for at least twenty years.

Now how can this possibly be of relevance to today’s constantly worried, hyper-active investor? This year alone, it seems we have staggered across rough plains, climbed and fallen back with every new twitch in interest rate expectations, plunged into post-referendum depths, soared close to all-time peaks and now we anxiously await a new year that bristles with apprehension and uncertainties.

We’ve moved from fully invested into fixed interest and cash, switched from stock market defensives into cyclicals, avoided banks, clambered out of emerging markets, bought bonds, sold bonds, bought back into banks, steered clear of oils and now piled back into oils. We can’t look away for a minute!

Now let’s see how a modern-day Rip Van Winkle would manage his investments. Twenty years prior to his wander into the mountains, Rip invested a lump sum of £10,000 in a generalist, broad-based investment trust. They’re not often written about. In fact, they are about as interesting as watching paint dry. Little wonder he fell asleep for 20 years.

‘Buffetting’ the market

Not for him t he mad scramble of performance-chasing or blindly following that fashionable investment guru Hugo Livermore Fleetfoot-Buffett, t he hero of t he financial pages. Over the years he’s moved from New Star Asset Management to Jupiter Global Opportunities, stopping for a quick burst at Neptune Emerging Market Situations, then Pluto New Technologies before finally striking out on his own with a hot new specialist fund – Uranus Utilities.

Now it wouldn’t be fair to say Hugo did not enjoy periods of success. These he did. Indeed on occasions, red-hot bursts of fame as one or two of his specialist funds soared in value.

Only the soaring-ups were often followed by the plunging-downs. And the net gains were depleted by fund switching fees, management charges and dealing costs. His followers were certainly taken on an exciting ride. But the overall gains were never as big as they hoped.

So how fared Rip Van Winkle after 20 somnabulent years doing absolutely nothing? Despite all the loud alarms of financial gurus and pundits – not even a Higgs Boson Hadron Collider installed by his bedside table would have awoken him – what might Rip have found when he awoke?

The £10,000 lump sum, based on overall weighted average investment company data and including dividends re-invested, would have grown over 20 years to £54,600. By comparison the same sum in a UK savings account (minimum investment £2,500) would have grown to just £12,600.

A slightly more active Rip Van Winkle would have done even better. Supposing 20 years ago he had started a £100 a month regular savings plan in favour of his son. Over this period he would have invested a total of £24,000. But Rip Junior would have found himself very well off indeed. After 20 years, based on the overall total return weighted average investment company data, this sum would have grown to £71,384, handsomely out-performing a UK savings account.

Now there are caveats that come with this. The obvious one is that past performance is no guide to what might happen in t he future. And over the last 20 years equity investors have enjoyed a very good run indeed. And to maintain an investment – either lump sum or regular savings – for so long would require, in addition to untroubled personal finance conditions which did not need to resort to long term savings, an enormous amount of self-discipline. Investment is more often than not governed by emotions – greed and fear uppermost among them – and an investor who held fast during the ‘big dipper’ periods betweem 2001-2003 and 2008-2010 would have been a brave creature indeed.

Even allowing for these, however, there are several lessons to be learnt from the Rip Van Winkle story. One is that successful equity investment requires investors to take a long-term view. Another is that constant chopping and changing of investment portfolios may not enhance overall returns as much as by ‘ staying put’ in a broad fund or trust. And finally, the costs of constant changes in terms of charges, fees and dealing costs can defray gains over time.

Professionals might scoff at the idea of a modern-day Rip Van Winkle investor sleeping for 20 years. But even a relatively short doze through the dramatic events of 2016 would have paid off. Since the EU referendum vote in June, when recession and financial market turbulence was widely expected, the FTSE100 Index rose over the subsequent five months by some 13 per cent. And an investor who rolled over and went back to sleep when the FTSE100 hit a low of 5,500 back in February would have been sitting on a 21 per cent gain come December.

Arise Rip Van Winkle: the Big Sleep might seem the worst of investment strategies. But it can bring forth rewards we thought possible only in our dreams.

‘Even a relatively short

doze through the dramatic events of 2016 would have paid off’