From the Crimea to the East China Sea, there are always political fears around the globe and in a world of sensational 24 hour news; you can be assured that seemingly even the most insignificant story can be blown up into something far more fearful and frightening. Thus, I can quite understand the fears of most when entrusting their hard earned savings into an investment market which seems so influenced by journalistic hyperbole.
The art of good investing is to try and take a longer view and not be deflected by short term fears and hysteria. Having said that, having just blind faith is no excuse for complacent ignorance of what is going on around you. The key is to try and avoid the main pitfalls and this is usually achieved by a process of broad diversification over different investment assets around the globe. Thus, if there is an unseen and unexpected disaster, it means that the extent of the damage caused is going to be limited. Sadly, I have seen over the years too many people taking big bets on the “next best idea” only to find that it fades and wilts as many such fashion fads do. So, how do we get rich with investing? And the answer is ‘quite slowly’. For example; a bet that goes wrong and drops the portfolio by 50%, means that just to get back to where you were; you will need a rise of over 100% and that is a rare achievement in any short period.
For a balanced investor, the opportunity of achieving say a 7% return each year will in effect double your funds every decade, a result which – I suspect – many longer term pension investors would have been delighted to have achieved. It seems that for many their investment experts have muddled up longer term investment and having a short term bet or punt.
Sadly, we are also fed the daily numbers of the FTSE100 rising and falling, and its gyrations do little to try and encourage nervous entrants into investing. The FTSE100 is – in fact – a most unreliable measure and investment friend, as its constituents adjust each quarter and it is dominated by the larger popular constituents of the time. This makes it then a far more volatile index than say the US S&P500 or even the smaller Dow.
There is though a more important factor. It may be seemingly rather dull but it is absolutely fundamental – the issue of compounding. Every year, Barclays Capital produces some useful statistics around this which underline its importance and value. Say, for example, a darling grandmother had put £100 into the FTSE All Share Index* 68 years ago for your pension, then as a grateful grandson you would be thankful but not wildly impressed to know that its value was now £9,347: however, if being a wiser soul she had organised for all those tiny dividends to have been reinvested during that time, that modest sum would have become a quite remarkable £177,620. So, what is more important… the daily bungee jumping of the FTSE 100 or the slow and steady accumulation of wealth over time – and over a time when many other political and economic crises have come and gone?
From this, we should learn that once we have all carried out our vital financial planning for our family, the investment should be a slow and steady approach to grow your family wealth, despite the frantic headlines of a neurotic media.
* This is made up around 95% by the companies of the FTSE 100 with other constituents in addition that make it a somewhat broader universe than the FTSE 100.