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Giving our investments the time to flourish

24 October 2022Insights2 mins read

Marcus de Silva

It’s been a tough year in stock markets: geopolitical turmoil, inflation, rapidly rising interest rates, and concerns that the knock-on effect will almost certainly send some economies into nasty recessions, have caused markets to fall and anxieties to rise.

During such times, investors tend to throw the baby out with the bath water: selling anything deemed remotely risky. And yet it’s all too easily forgotten that stock market falls are part and parcel of normal market cycles and that sitting tight during moments of anxiety is often the best strategy. Here we look at why giving our investments the time to flourish, is one of the most important concepts in investing.

Picking the right horse for the course

Setting a sufficient time horizon is the cornerstone of any successful investing strategy. Different assets come with different risks – the variation in returns we potentially receive – which means we must invest in the appropriate asset classes for the time horizons of our financial goals and the risks we are willing to take.

Cash is viewed as fairly risk-free, so may be appropriate for nearer-term goals. Turning the dial up a bit, there are bonds, such as government and corporate bonds. Here, we see the risks increasing and therefore potential rewards or losses, so a longer horizon is likely needed if we are to invest. 

Then we get into stock market investing – buying into the shares of companies. As broadly the riskier of the asset classes, price swings can at times be fairly wide. It’s why there’s the potential for greater gains, but also greater losses, therefore setting a much longer investing time horizon is wise if we hope to avoid being in the red with our investments when it comes to selling them. 

Understanding that it can be a bumpy ride helps us to appreciate why during these times we need to hold on tight to our investments.

The ups and the downs along the way

Stock market values are a reflection of information, meaning that as news emerges that changes the operating environment for companies – be it regarding the economy, geopolitics, or at times, the businesses themselves or the sector they’re in – markets will shift as they absorb the impact of that information and reflect it in the value of shares. 

At certain times, the news can be particularly grim, and falls may be hefty. History tells us that not only is this very normal, but economies and stock markets tend to recover and that the ups and downs will almost certainly happen again and again as economies journey through their natural cycles.

As a result, stock markets go through long periods where they rise, known as bull markets if gains are more than 20%, and shorter periods where they fall, known as bear markets if falls are more than 20%. 

From 1946 to the beginning of this year, the UK market, as measured by the FTSE-All Share, has seen 11 bull markets and 10 bear markets, with the bull years accounting for nearly 65 of those 76 years, and bear markets just 11.1

While some of the bear markets have been nasty, the bull markets that have followed have been longer and stronger. Black Monday’s crash in 1987 led to a 34% decline over the ensuing months, and yet, the bull market that followed lasted nearly 13 years and delivered an eye-watering gain of 571% from trough to peak.1

What is more, a big chunk of the gains tends to come soon in the recovery periods that follow, sometimes in the days that follow. It’s why it’s so important to remain invested and keep your investment time horizon sharply in view. 

Warren Buffett, one of the world’s most successful investors, in a letter to his investment company’s shareholders in 1996, famously remarked: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” 

HOW ALLIANCE TRUST IS FARING 

The Alliance Trust portfolio contains a mix of companies, some that produce profits today and others that are investing their capital with a view to generating profits tomorrow. The latter have been particularly punished in the current state of market anxiety regarding rapidly rising interest rates. By some estimates, the value of shares of these ‘high growth’ companies has fallen 65% from 2021 highs.2

The Sands Capital team believes: “…in extreme times, markets tend to shorten their focus. They stand like deer transfixed by headlights, unable to look past the macroeconomic gyrations to see the road ahead.” 

Sands Capital believes this creates opportunities for stock pickers. By finding companies with strong fundamentals – the qualities that lead to business success – they will emerge stronger out of this volatile period and thrive. By giving investments the time to flourish, this is how they generate wealth for investors over the long term. 

More widely, investment trusts have a long history of surviving and thriving out of recessions. This is because, unlike unit trusts, the money they invest is separate from the shares investors purchase in order to make an investment. It means that stock pickers aren’t forced to sell assets at times when it is inopportune, enabling investment trusts to withstand market shocks and weather storms and invest for the long term.

Since the first was launched in 1868, investment trusts have endured 12 economic downturns, including periods where inflation has been very high and growth lacklustre. In particular, if we look to the periods following the early 90s recession and the global financial crisis, the average investment trust produced a positive return within three years of the recession beginning.3

Markets are undeniably volatile, but it’s at times like these we must be patient. So, hang on – it may be a bumpy ride. But it’s worth it in the long run.

Marcus De Silva is a Freelance Investment Writer

1. https://www.vanguard.co.uk/content/dam/intl/europe/documents/en/bear-and-bull-chart-uk-en.pdf

2. https://www.sandscapital.com/uncovering-long-term-opportunity/

3. Source: AIC/Morningstar. Time for average investment company to recover losses is the amount of time until the average investment company permanently recovered the losses it suffered since the beginning of the recession.

This information is for informational purposes only and should not be considered investment advice. Past performance is not a reliable indicator of future returns. The views expressed are the opinion of the Manager and are not intended as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell any securities. The views expressed were current as at October 2022 and are subject to change. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. You should not assume that any investment is or will be profitable. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. TWIM is the appointed Alternative Investment Fund Manager of Alliance Trust plc. Alliance Trust plc is a listed UK investment trust and is not authorised and regulated by the Financial Conduct Authority