Keep calm and carry on
It would be a fair statement that the last 12 months have proved to be a politically volatile period. Starting with Brexit in June 2016, followed by Donald Trump’s surprise US election win, several European elections and the most recent shock announcement of a hung UK parliament at the start of June.
With the unexpected comes uncertainty and if there is one thing retail investors do not like, it is uncertainty. This is because uncertainty can breed volatility, just look at how UK small and mid caps plummeted in the wake of Brexit as domestically orientated stocks took a bashing.
This time around experts are predicting the hung parliament to provide a weaker outlook economically, and after a strong rebound since last June equity markets are predicted to weaken. As a result, it is little surprise that with headlines in the media predicting doom and gloom many investors will be questioning their current range of investments.
Should I pile into gold? Should I cut my UK exposure? Should I look to absolute return funds? Should I run to cash? All are questions which may be on the lips on some right now, especially at a time when inflation is rearing its ugly head again.
The short answer, and it is very short, is no. If Brexit and the US elections proved anything it is that markets are incredibly resilient. After a couple of days of heavy falls, UK small and mid caps quickly recovered, going to show that by the time individual investor are able to act, markets are likely to have already priced in the shock result.
“The short answer, and it is very short, is no”
In the US meanwhile the last of the Trump trades – namely those US stocks which rose as result of the President’s promises regarding tax reforms and infrastructure spending – has now turned negative as his policies have unraveled, while after a prolonged period in the doldrums the economic and political situation in Europe appears to have finally turned a corner.
The point is that if you are genuinely investing for the long-term, events which take pace overnight should not majorly impact your financial plan. To illustrate this piece, I recently wrote an article which looked back all the major events to have place over the last 17 years. This was period which includes the TMT bubble, the global financial crisis, and a host of political and regulatory upheavals.
Given all this, it would not be surprising that investors – who have always been accused of being too short-term – would have naturally got nervous and thought to sell. So what better exercise to test the benefits of investing long-term than to see what were the best performing Investment Association (IA) sectors over such an extended period of time.
For the points of illustration the dates picked for when the data starts and ends (October 2000 to May 23, 2017) coincided with the launch of the trade magazine Fund Strategy, for which I was writing the last ever cover story for.
In terms of equities the top three might not surprise you. Sitting top with a hefty return of 417.21% was the IA China/Greater China sector. This was followed by the Asia Pacific ex Japan sector, where the average fund returned 328.58%, while sitting in third place was the Global Emerging Markets sector, in which the peer group generated an average return of 273.90%.
“An investment in a UK Smaller Companies fund would have proved a shrewd investment”
For those who stayed closer to home, an investment in a UK Smaller Companies fund would have proved a shrewd investment, with the sector returning 264.15%, a significant margin ahead of its bigger cousin the IA UK All Companies sector, which returned 128.33% over the same time period.
Those investors who stuck with Japan and the US, might be annoyed to find that as an investment, UK Gilts trumped both over the last 17 years. Versus an 87.95% return from North America and just 33.31% from Japan, the IA UK Gilts sector gained 121.77%. The UK Index Linked Gilt sector returned an even more impressive 221.12%, while the Global Emerging Market Bond peer group rose 220.25%.
“The IA Europe inc UK sector outperformed the Europe ex UK, returning 193.96% versus 141.43%”
Meanwhile, busting the myth that investing in Europe excluding the UK is better than adopting a pan European approach, is the statistic that the IA Europe inc UK sector outperformed the Europe ex UK, returning 193.96% versus 141.43%.
Of course this is illustrative, but it goes to show the benefits of staying investing. It also does not mean that you should not be constantly reviewing your portfolio. Shock political results can often bring shortcomings in a portfolio into focus and a portfolio review can allow to prepare for the next event, known or otherwise.
Adam Lewis is a freelance journalist and content director at Matrix Solutions
He has worked as a financial journalist for over 14 years, the last 10 of which were at Centaur where he lately edited Fund Strategy magazine for 3 years until February 2015. He has won five awards for journalism excellence, including AIC Trade Journalist of the Year (2002 and 2008) and IMA Specialist Reporter of the Year (2005).
Keep Calm and Carry On is a guest post and the views here do not necessarily concur with those of Investment Quorum. In fact, it is very often the case that we may be largely in disagreement but we respect the opinions of others and value their contribution to the wealth management debate. Guest posts may appeal more to some than others and may often have an industry, stock market or sector knowledge expectation.
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