Don’t panic! Keeping cool pays dividends: Even in times of strife, the stock market will deliver
- Reinvesting your dividends is a good way to ensure your pot grows over time
- Long-term confidence can give us longer term wealth
It is in moments of financial or political stress that investors need to keep a cool head.
Having gone to the trouble of building an investment portfolio based on sound logic and financial evaluation, we seem so easily to be frightened by disturbing headlines and Mystic Meg market predictions which have the effect of fracturing our logic with emotion.
Fear and greed are the two main drivers for most investors, I have found.
The easiest thing for nervous investors is to sell and go into cash. Easily done, but there is not much comfort here with pathetic deposit rates not even keeping up with inflation
The past few months have seen some unnerving stories for investors with poor portfolio risk management in the Woodford funds, through to the Boris barrage of election hyperbole and headlines.
All this has already made many investors nervous and thus all we needed was to find a suitable cherry to top it off.
What we actually received, in fact, was not just one cherry but a whole jar of the wretched things, courtesy of President Trump and the Iranian mullahs exchanging not just standard threats and insults, but reverting to live missiles.
The knee-jerk reaction to all of this was the rush to the apparent safety of those tiresome supposed safe-haven assets.
Of course, there is the security of cash, then the apparent allure of that ‘store of value’ gold.
The easiest thing for nervous investors is to sell and go into cash. Easily done, but there is not much comfort here with pathetic deposit rates not even keeping up with inflation.
Then of course there is the difficulty of timing when to buy back in again.
The best opportunities of buying something cheap are nearly always missed. It was usually yesterday.
Secondly, we have the siren calls of gold. Yes, there is only a limited amount, but there is one huge drawback – you cannot live on it.
Personally I would rather treat it as a form of financial teddy bear that I can stroke for comfort on my pillow, but there is no yield or income.
Then there is the issue of oil. Over the past few decades, we have all been accustomed to the idea that the slightest nervous twitch will cause the price of crude to rocket and for our global economy to be tipped into depression.
Yet things have changed. Even President Trump highlighted the point that the US no longer imports nor needs foreign fuel and, as a result of going fracking mad, even had to change regulations to allow the US to export such energy for the first time.
Also, we can take some comfort that at last our efforts to have green energy are now bearing fruit. For the first time alternative fuels are providing very significant proportions of our power needs.
Oil is still important but our dependency is nowhere near where it was. We live in volatile times – when do we not? – so this seems like a good moment to recall that investment superpower: compounding.
The power of compounding is merely letting a range of quality investments grow and re-investing their dividends over time.
The equivalent of kryptonite is the illusion we can be clever and beat the market by trading at precisely the right time.
Just remember that £100 invested into UK Shares (the equivalent of the FTSE 100) in 1945 would now have a nominal value (as of the end of 2018) of £10,933 which is positive but hardly exciting.
But if you had reinvested all those often quite small dividends over that time your sum would have grown to £238,690.
So let’s look at a more recent example.
The FTSE 100 fell dramatically after the Brexit vote. Yet within a few weeks we had seen a firm recovery.
Those who were panicked into selling found that they had lost not just capital value, but the fuel of the compounding phenomenon: their dividends.
I realise compounding is a long term benefit, but this is how we should be thinking about personal and family investments.
Remember this is not betting, that after all is why we have horse racing. Long-term confidence can give us longer term wealth, but we must never let this be broken by fearful headlines and alarmist commentators stroking their ego with your losses.
Justin Urquhart Stewart is co-founder of Seven Investment Management.