Choices that we hope will stand the test of time are made on the most immediate, short-term considerations – but can affect the performance of our investments for many years ahead.
It can also encourage a ferocious insecurity. If the short-term outlook is our main criterion for investment, no sooner have we made our dispositions than more threats and apprehensions come along, causing us to change decisions made less than 12 months ago.
For too many investors, “rotation” barely begins to describe their fearful investment approach: it is like a constant turning of the barbecue spit, with nothing properly cooked and the fuel-laden risk briquettes piled on until we are desperately pulling out the charred sausages before they are burnt to a crisp.
However, the alternative is an investment life constantly quivering on the sidelines, piling up cash in fixed interest investments offering derisory returns until the weather lifts.
There is no easy way around this conundrum. We are all human, professional fund manager and novice investor alike, susceptible to immediate concerns and all too easily influenced by what we see and feel.
So how can we invest in a manner than enables us to look past the immediate bumps in the road? Several changes can be made for the better. The first is to accept the reality that there will always be “bumps in the road”. But the longer your time horizon, the more these diminish in size and disruptive influence. For equity investment, the time horizon ought to be five years or more. An open-ended equity fund or closed-end investment trust can provide a spread of investments over markets and sectors that cushion volatility. And when dividend income is re-invested, the total return can grow appreciably over time.
Take, for example, the cautiously managed City of London Investment Trust. This £757 million trust will never set the heather on fire. Its portfolio of holdings broadly comprises blue-chip equities – many of the companies in the FTSE 100 index – such as British American Tobacco, Royal Dutch Shell and GlaxoSmithKline. Its highest weighting is to financials, at 20.3 per cent, followed by consumer products and services.
City of London is a perfect example of the broad-brush, defensive investment trust of a type often described by radical rivals as dull. But over a decade that has experienced a global financial crash, massive bank failures, emergency central bank stimulus, record levels of government debt and tightly constrained bank lending, this trust has gained more than 200 per cent, while the sector made 181 per cent, according to FE Analytics.
It has one of the best records of consistent dividend growth and the focus of its manager, Job Curtis, on blue-chip international companies has not just provided stability, but has paid off handsomely. It is currently sporting an attractive yield of 3.8 per cent.
Even for cautious investors, this must seem about as exciting as watching paint dry. How about something that is still broad-based, but racy in comparison?
A popular favourite for those unfixated by immediate problems and who have a long-term investment horizon is Scottish Mortgage Investment Trust. It is not a big dividend payer – the yield is just 1.1 per cent – but instead its analysts has brought focus to bear on companies offering strong growth potential over the long term. Over ten years, the trust has made more than 280 per cent, beating the global growth index, according to FE Analytics. Over the five years to this week, it has gained 155 per cent.
Meanwhile, Scottish Oriental Smaller Companies, managed by First State, has returned a staggering 1,148 per cent since 2000, turning a £10,000 lump sum into £124,800. But it can hardly be described as mainstream. RIT Capital Partners is a well-diversified global fund, which takes positions in unquoted and quoted companies. Another strong performer in the global growth sector is British Empire Securities, which has returned 1,084 per cent over the last 20 years.
Moral: no investor can turn a blind eye to immediate problems and worries. But when you lift your time horizons, some very substantial rewards are there to be found.