Financial Times Guide to Investment Trusts: Unlocking the City's Best Kept Secret (Financial Times Series) by Baron John C

Author:Baron, John C [Baron, John C]
Language: eng
Format: epub
ISBN: 9781292005096
Publisher: Pearson Education Limited
Published: 2013-08-27T00:00:00+00:00

Time horizons

You should only invest in the stock market if you have a decent time horizon. All the evidence shows that equities, with dividends re-invested, perform better than bonds or cash in a bank over the longer term. Figures produced in the annual Credit Suisse Global Investment Returns Yearbook are revealing. Looking back since 1900, global equities have returned an annual 5 per cent after inflation, compared to 1.8 per cent for bonds and 0.9 per cent for cash. In the UK, the respective figures are 5.2 per cent, 1.5 per cent and 0.9 per cent.1

Logic dictates that good companies should be growing profits faster than prevailing interest rates. Otherwise, what is the point of being in business: entrepreneurs might just as well put their money in the bank and avoid risk?

Shareholders in such companies should benefit accordingly, but the path is rarely a smooth one. Equity investors can suffer poor decades. Factors such as economic cycles, management decisions and often luck ensure share prices fluctuate more in value than cash earning interest in the bank and provide lacklustre returns. Therefore, the longer an investor can remain invested the better. Financial advisers vary in detailing what ‘longer term’ actually means, but I suggest a minimum of five to ten years is required when it comes to equities.

There used to be a very approximate guide that the percentage of bonds in a portfolio should reflect the investor’s age – for example, 30 per cent if aged 30 and so on. This reflected the view that as an investor got older and time horizons shorter, they would want to reduce the risk of the portfolio by investing in bonds. This would particularly be the case as you came closer to meeting the funding objective, in order to reduce the risk of a short-term fall in the portfolio’s value scuppering the looming requirement.

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