Market View
Time in the Market – Not Timing the Market
Justin Urquhart Stewart, leading financial commentator and founder member of Seven Investment Management, in an exclusive article for Willis Owen investors gives his view on market conditions and the benefits of long term investing.
This time last year there was much wringing of hands and worrying about the state of the global economy. Fears abounded about the strength of the recovery from the damaged economies and underlying growth still coming from the East. A year later and many of those concerns are still there – but if you had had a balanced broadly diversified portfolio of investments around the globe you would have probably seen a growth of nearly 10% over the past year. This just underlines that investment markets do not run in tandem with economies.
Thus one of the old investment disciplines has been proved right again: “It’s not timing the market but time in the market”.
Now the fears that are filling the headlines revolve around the potential for a double dip back into recession. Is that going to happen globally? That seems to be unlikely, but for the UK it might be more likely that we are going to be seeing an extended period of low slow growth. Overall the world economy will continue to grow but not evenly, as the developing nations still show a clean pair of heels to the old world nations.
So what should we be doing now? The answer is clear. Firstly to take advantage of your tax free investment allowances with your ISA, and then to invest on a broad basis around the globe to take advantage of the growth.
This though does not mean that you have to be taking higher risks by investing in some highly volatile and concerning areas of the world. It may be wiser to invest in the effect of the growth of the developing nations, rather than in the nations themselves. Perversely, much of the demand from these countries can be seen far closer to us in our own domestic FTSE 100 index.
Over 65% of the profits from the companies in this index come from overseas, whether they are mining companies benefiting from the demand from China, the oil companies, drug and medical companies, or even the likes of the globally networked Vodafone.
There is another key element to longer term investing which is often forgotten. On the assumption that you are going to keep your ISA for some years, let me highlight the vital importance to you of the power of dividends. If for example your grandparents had put £100 into the stock market in 1945, and had reinvested all the dividends, your paltry £100 would now have grown to a quite staggering £119,238 by the beginning of 2010. If however you had just spent the dividends, then you would instead be receiving a far more disappointing figure of £7,149!
Dividends are vital to gain the real benefit of compound growth and turn your ISA into a very significant investment account, and the good news is that many companies listed on the UK market are well known for being a steady and reasonable source of dividends. Many of the large pension companies rely on such payments as one of the mainstays of their investment needs, and thus there is no reason why you should not exactly the same with your ISA.
Remember there is no such thing as a successful “get rich quick scheme”. Good investing has some very clear and simple disciplines - and can even be called quite dull. Firstly you broadly spread your investments across all the asset classes and not just shares. So you can include, Gilts, commodities, property currency and various others so the volatility of your portfolio is spread. The ISA is simply a tax wrapper, so what you put into it is what really counts.
After that it is down to time and the effect of compounding over the years. So for example if you achieve an average of 7% each year then your money could roughly double in size every ten years. So in forty years your £8,000 ISA becomes a £128,000 ISA. Not bad for dull!