Don’t panic – just sit tight and ride out the storm

The Scotsman - - Business - Com­ment Bill Jamieson Volatil­ity is an in­evitable and time­less char­ac­ter­is­tic of mar­kets

To­day I set out six in­vest­ment rec­om­men­da­tions with a dis­tinctly Scot­tish flavour. They will sur­prise some, and, I sus­pect, out­rage more. But first, let me set the record straight on that cur­rent bete noir of in­vestors. It is the great stom­achchurner of volatil­ity – and no more ev­i­dent than in the past few weeks, with pre­cip­i­tous falls (and head-spin­ning rises) that have made the his­tory books.

In­vestors in the main hate volatil­ity. They wish mar­kets to be calmer and more orderly, with gen­tle ad­just­ments spread over time. Dream on. Volatil­ity is an in­evitable and time­less char­ac­ter­is­tic of mar­kets. Un­nerv­ing though mar­kets swoons and swoops may be, to rail against them is akin to a sea cap­tain be­moan­ing the move­ments of the ocean and changes in the weather.

Amid the pitch and toss of these move­ments and the howl­ing gale of the news cy­cle, it is easy to lose sight of three tru­isms: volatil­ity is nor­mal; shares al­most al­ways out­per­form cash sav­ings in the long term, and the stock mar­ket should form at least part of a longterm sav­ings port­fo­lio.

What has made the lat­est bout of volatil­ity so un­nerv­ing is that it fol­lows a his­toric ten years of near-un­in­ter­rupted gains. Back in Au­gust shares on Wall Street set the record for the long­est bull mar­ket ever – which saw US stocks rise by 320 per cent over the past ten years.

Ac­cord­ing to In­vestec Click and In­vest, over the past 38 years, pe­ri­ods of volatil­ity have oc­curred fairly reg­u­larly. Twenty-one of the 38 years be­tween 1980-2018 have seen at least one dou­ble-digit dip in the stock mar­ket. Yet be­tween 1980 and 2018 the Stan­dard & Poors 500 In­dex has pro­vided av­er­age re­turns of nearly 12 per cent a year.

Much the same is true of the UK mar­ket. Ac­cord­ing to the Credit Suisse global in­vest­ment re­turns year­book analysing data go­ing back to 1900, de­spite wars, de­pres­sions, re­ces­sions and dra­matic falls such as in 197374 and 2001-03, eq­ui­ties have been the best in­vest­ment over time.

In sim­ple cash terms, £1 put into the Bri­tish stock mar­ket – and with div­i­dends re-in­vested year in, year out – would now be worth £22,432. Even af­ter ad­just­ing for in­fla­tion since 1900, the same £1 in­vest­ment with div­i­dends re-in­vested would be worth £291, far out­strip­ping the re­turns from in­vest­ing in bonds.

Pa­tience can be a hard taskmas­ter, par­tic­u­larly when look­ing at the FTSE100 in­dex per­for­mance over 19 years: back in De­cem­ber 1999, it peaked at 6,900. To­day it stands at 6,733.97, down 167 points. But the com­par­i­son omits the pow­er­ful ef­fect of rein­vested div­i­dends, and the greater abil­ity to con­tain risk through geo­graphic and as­set di­ver­si­fi­ca­tion.

Through di­ver­si­fi­ca­tion in­vestors can in­su­late them­selves against volatile events. On Brexit, for ex­am­ple, Click & In­vest as­sesses the im­pact of even a ‘no deal’ de­par­ture would be min­i­mal, as only UK – and, to a lesser ex­tent, Euro­pean – as­sets would be im­pacted.

And the best an­ti­dote to volatil­ity is time. While it is tempt­ing to panic when faced with volatile mar­kets, the best re­ac­tion more of­ten than not is to sit tight and ride out the storm. Even those who in­vested right be­fore the fi­nan­cial crash just over a decade ago would now be sit­ting on re­turns of over 100 per cent – far bet­ter than cash savers, who would have earned just 17 per cent. In the long run, then, the cost of not in­vest­ing may be far greater than an iso­lated dip.

Now for those pesky in­vest­ment tips. The ul­tra-de­fen­sive Ed­in­burgh-based Per­sonal As­sets Trust re­mains my favourite for all sea­sons – but par­tic­u­larly over the next 12 months where I feel I will need some bal­last against some very lively volatil­ity. Martin Cur­rie man­aged Se­cu­ri­ties Trust of Scot­land (153p) is a global in­come trust of­fer­ing a div­i­dend yield of 4 per cent and some in­su­la­tion against Brexit shocks. I have also long been afanof Scot­tish In­vest­ment Trust (759p) which keeps a sharp eye out for shares with re­cov­ery po­ten­tial and those that have fallen too far out of favour.

At Bail­lie Gif­ford man­aged Scot­tish Amer­i­can In­vest­ment Trust (SAINTS), co-man­ager Toby Ross is keep­ing his eyes fo­cused less on global mone­tary pol­icy than on bot­tomup share se­lec­tion (“we have more money in more global, high-qual­ity UK growth busi­nesses, which aren’t likely to get dragged down by Brexit un­cer­tain­ties”). The shares at 349p of­fer a yield of 3.2 per cent.

Here read­ers may need a strong stom­ach: I ven­ture forth with Royal Bank of Scot­land. Chief ex­ec­u­tive Ross Mcewan de­serves more credit than he has been given for stew­ard­ing the bank through ar­guably the most dif­fi­cult pe­riod of its di­vest­ments and re­con­struc­tion – the harder stuff that is al­most al­ways left to the end. There will be spec­u­la­tion on his suc­ces­sor (he steps down in 2020) and fur­ther gov­ern­ment share sales are due. But the group is back on the div­i­dend list af­ter nine hor­rific years and the shares at 214.1p (down from 302p in Jan­uary) have re­cov­ery po­ten­tial.

Fi­nally – and here, too, a tran­quil­liser dart may be in or­der – I sug­gest the stricken Stan­dard Life Aberdeen may see a re­cov­ery be­fore 2019 is out. Af­ter a share price plunge since the merger, and the exit of £16.6 bil­lion of funds in the first half of 2018, it is stag­ger­ing that a group of such mar­ket­ing mus­cle and po­ten­tial can keep haem­or­rhag­ing at this rate. New chair­man Sir Dou­glas Flint (ex HSBC chief ) should be the cat­a­lyst for other man­age­ment change.

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.