Powering investment portfolios
It was fifteen years ago that the FTSE 100 hit it’s all-time high of 6930. This was on the Eve of the Millennium, when much doom and gloom had been forecast to happen with computers all due to pack things in and all sorts of dire consequences.
Despite the Millennium Bug leading to nothing of the sort in both investment and world terms a huge amount has happened since.
We have had the technology investment crash, the 9/11, 7/7 and a host of other terrorist attacks, the Iraq and Afghanistan wars, the rise and fall of the BRICs, the global banking crisis and subsequent credit crunch and all that those events entailed, including rampant money printing, negative interest rates and massive bond yield fluctuations.
We have a Conservative led coalition government, UKIP making political inroads and the United Kingdom is still intact – for now at least and with the Eurozone in disarray with negative yields and Greece again being talked of in ‘Grexit’ terms the voters of the United Kingdom look set to have a vote on whether to stay or also to exit the European Union. The similarly termed ‘Brixit,’
OPEC is holding the price of oil down with its production maintained which is driving oil prices rapidly downwards and the Soviet Union is suffering hugely in economic and currency terms because of sanctions over it’s Ukraine ambitions.
So the landscape has been obviously particularly tough for investment markets, investors and fund managers trying to navigate their way along preserving and growing their capital.
I suspect if we had told investors and our clients that Britain’s index of leading stocks, the FTSE 100, back in 2000 would actually be lower in 2014, they would not have believed us.
Well it’s true. Fifteen years on the index is lower than it was at the Millennium but despite what you might think for investors it has been a great 15 Years, always assuming that they stayed the course and ignored the short term volatility and the often sensationalist financial press predicting more doom and gloom.
To have sold out would have been a huge mistake. This is because even though the headline number is still lower today, the FTSE 100 would still have returned more than 50% even if you had invested at absolutely the worst possible time.
Investors who invested in the FTSE All Share, would have done even better and would have seen a total return in excess of 70%.
Since the vast majority of investors will have invested at much lower prices during the last 15 years, they will have done even better than that.
So how has this come about? How can a headline number which appears to prove investors would be worse of and completely undermine the case for investing in the stock market do precisely the opposite?
I will go on to explain here but would remind readers at this point of the main reason to invest in the stock market which is to preserve and grow the purchasing power of our capital against the pernicious effects of inflation. Inflation, even at relatively low levels destroys our purchasing power over time.
The reason we can demonstrate that investors have continued to do well, over time, in stock markets it by demonstrating the power of income within portfolios and how income grows over time to the benefit of investment strategies.
Dividends are the key reason that the UK stock market and other global stock markets can power your investment portfolios. However, this will only work if you reinvest these dividends within the portfolio to assist growth.
To demonstrate this, if you had invested £10,000 in the FTSE 100 on 31 December 1999 and withdrawn the available dividends as income, you would have netted just £9,137. However, if you had reinvested the dividends back into your portfolio it would have produced a return of £15,213.
I said previously that FTSE All Share had done even better. Your £10,000 would be worth £10,500 if you had withdrawn your available dividends but reinvested they would have produced £17,206.
Currently FTSE 100 currently is yielding around 3.5%, so the odds are still stacked in your favour.
Our portfolios will, at any given time be holding a diverse range of funds and therefore an even more diverse range of individual company equites. These underlying company equities will often have a far higher yield than the market and companies such as BHP Billiton, BP, Centrica, GlaxoSmithKline, Royal Dutch Shell and Vodafone yield in excess of 5%.
It is our belief that it is incredibly difficult to time the market and that a long term diversified portfolio is your best chance of achieving your investment objectives.
However, just by using a little make-believe and assuming that you do have access to a crystal ball and got everything right timing wise and had invested this same £1000 into the market at the best possible moment, 12 March 2003, and sold when the index hit its recent 52-week high of 6878 on 4 September 2014, you would have made a 218% return.
Hey presto! Your £10,000 would become £31,800 over that period.
As I have said we don’t believe that timing the market this closely and accurately is possible so an investment strategy without the power of the crystal ball but with the power of dividends delivers the optimum chances of success.
I hope that this article has gone some way to explaining our investment philosophy, investment is aimed at preserving and growing capital to preserve the purchasing power of capital, re-invested dividends greatly assist portfolio returns and diversification through multi-asset class funds all combine to give the best possible chances of reaching your investment goals.
*All figures quoted were gained from Alpha Terminal and the Financial Times, January 2015.
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Lee Robertson, CEO
Lee is a Chartered Wealth Manager and is listed in the definitive Spears Wealth Management Index as one of the UK’s top 10 wealth managers. He is a regular contributor to the financial press and is often on television discussing wealth management and investment issues.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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