W
L
BUILD A PORTFOLIO THAT
MEETS YOUR NEEDS
by Sam Hulson of First Equitable
The earlier you commit to an investment strategy, the longer
your money can work in the market. However, the world is an
uncertain place at the moment. The deadline for the United
Kingdom’s withdrawal from the EU is edging closer, and there is
also the ongoing threat of an all-out trade war breaking out.
Investing should be for the long term. Why? Because markets and
the economy have a tendency to rise over time. For investors, this
should mean a return on investment for people who can ride out the
ups and downs along the way – a reward for the extra risk they’re
taking.
KEY DRIVERS OF LONG-TERM RETURNS
Fundamentals and changes in value are the key drivers of long-term
returns, and they are possible to forecast with a degree of accuracy
rather than trying to time the markets or second-guess rises and falls
in prices.
But throughout history, we have seen periods of extreme volatility
when there have been rallies and sell-offs time and time again for a
variety of reasons. With long-term investing, you can expect cycles
– periods of falling prices followed by a recovery. A key to successful
investing is being comfortable knowing that there will be falls as well
as rises in the market.
CYCLICAL IN NATURE AND PRONE TO VOLATILITY
Many people will remember the dot-com bubble of 2001 and
the global financial crisis of 2007. However, stock markets are
cyclical in nature, and although prone to volatility, markets and
wider economies have a tendency to rise over time. This applies to
everything from share prices and earnings to wages and the price of
household goods.
On the other hand, short-term returns are driven by changes
in valuation and investor sentiment. These are impossible to
forecast consistently and trying to time the markets can also mean
potentially locking in losses and missing out on gains.
RETURNS GENERATING MORE RETURNS
Compounding is one of the reasons long-term investing has the
potential to give such great returns. This is the snowballing effect
of your returns generating more returns. In the stock markets,
compounding is usually a result of reinvesting dividend income.
Companies are collectively owned by their shareholders, and their
board members may agree to pay investors their share of the profits
through a dividend.
Dividend-paying shares are a staple of most income-seeking
investors’ portfolios. But when the income is reinvested, we can see a
significant increase in total return over time. This makes them ideal
for investors who are seeking growth – especially as a stable and
growing dividend is seen as a sign of good corporate governance.
POLITICAL UNCERTAINTY OR VOLATILITY
When people feel nervous about investing – perhaps due to political
uncertainty or volatility in the stock market – a common reaction
is to sell their investments and keep their money in cash. Cash is
seen as a ‘safe’ asset, but it does leave investors open to the risk of
inflation. Inflation erodes the buying power of your savings over
time. Your account balance doesn’t change, but you can buy less with
your money.
Although markets have been volatile and there remains uncertainty
over the global political future, there will always be reasons not to
invest and scenarios to worry about. However, you must remember
that every period of time spent out of the stock markets is a period
of time potentially missing out on returns.
WE DO THE HARD WORK FOR YOU
If you have a long time horizon and can accept the fact that markets
tend to rise and fall along the way, whatever the future holds, we’re
here to help you build the portfolio that meets your needs. When
it comes to managing your money, the financial markets can be a
daunting place – that’s why we do the hard work for you.
To discuss your requirements, please contact us on 0151 236 9973.
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