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