The Oxford English Dictionary defines ‘investment’ as committing resources with the expectation of future benefits. This is exactly the activity in which our clients are engaged. If they are in their 30s or 40s, they are committing a percentage of their remuneration to save for a reasonable level of income in later life. Many are closer to an anticipated date when they can free themselves from the rigours and stresses of their working lives. A high percentage who are already in retirement are enjoying the rewards of their commitment to investment. In each age group, investment is a long-term commitment, but the benefits are well worth achieving.
Recently, I have spoken to a number of young people who are really interested in investing, and each spoke about how they shared ‘tips’ with their friends. This is excellent news because there is a huge deficit of financial education and understanding amongst the young. However, in each case, the conversation revolved around the word ‘investing’ rather than ‘investment’. They had done their own research, monitored performance almost on a minute-by-minute basis, and were looking for a quick gain from a particular share or index. There is nothing wrong with this, simply that it is ‘investing’ and not investment. We know that markets move, influenced by interest rate changes, inflation, geopolitics, and market sentiment, none of which we can accurately predict. Fluctuations in markets happen.
On this Sunday morning, the USA are dropping bombs on Iran and have reportedly killed the Ayatollah. On Friday, the US market closed down based on increased inflation indicators and fears about the adverse effect that artificial intelligence may have on certain industries. This can definitely be described as a period of uncertainty for investors, particularly those who do not have diversified portfolios with well-spread asset and geographical allocations.
In the rest of this newsletter, I will explain one or two factors which may have been overlooked by those who have recently embraced the need or excitement of investing. The first pointer is the importance of global diversification. Many investors will aim to achieve this diversification through the purchase of a fund which tracks an index. The choice is wide, but you need to take care that you understand what you are tracking and, even more importantly, what you are not tracking. Those tracking the MSCI World Index may not realise that the fund is only tracking shares listed in the developed markets, thus excluding countries such as China, India, and the emerging markets, which in turn excludes exposure to the shares of companies such as Samsung, Alibaba, and TSMC.
The next aspect to consider is the percentage to allocate to specific shares. Complex research is needed, and an amateur may not have access to this level of information. Therefore, the next best thing is to use a tracker where the share allocation is taken out of your hands. However, you must realise that the tracker will hold the exact proportion of the shares which are being tracked. You cannot hold more or less of any particular share. If you invest via a managed fund, the manager of a collective fund can hold the same stock as the tracker fund, but the percentage is not restricted. For example, the percentage of BAT held in the L&G UK Tracker is 3.3%, but the manager of the Premier Miton Monthly Fund, Emma Mogford, holds 4.1% – I suspect because of the dividend return. Similarly, she holds 5.65% of GSK, while the tracker is restricted to 2.6%. This demonstrates the value of a fund manager, who is not bound to hold all the shares in an index and, based on first-class research, can produce consistent returns over long periods. Such managers frequently hold a concentrated portfolio of, say, 50 stocks, with minimal turnover of, say, three years. Excessive turnover is expensive.
Those new to investing make the mistake of judging managers on short-term performance. This is not helpful. A three-to-five-year term will produce the meaningful results which the committed investor is expecting.
At the start of this article, I alluded to the potential volatility we are likely to see in the market because of the current geopolitical activities. It is at times such as this that those with well-spread portfolios, across regions and assets, are likely to be less impacted by a fall in the markets than those who have been handpicking their own shares.
Research suggests that we are more averse to loss than excited by gains. Those who are upset by their losses frequently take a knee-jerk reaction to the situation and sell, rather than waiting for the recovery. To any readers affected by this concern, I stress the importance of holding on because it is very difficult to time a re-entry into the marketplace. Our clients with portfolios spread across geographical regions and asset classes have been well trained to be prepared to weather a fall in the market. Keeping a bundle of emergency cash is always a good idea.
Finally, I wish to encourage anyone who has decided to learn about investment. The journey will not be smooth, but the results will be satisfying. At some point, you may need advice and, if so, there are many well-qualified financial advisers working across the UK to help those on the road to investment commitment.