The temptation of numbers
Robert Davies, Fund Manager VT Smart Dividend UK Fund
The FTSE 100 index has recently moved above the 7,000 level though it is fair to say that the progress has been slow and cautious. Indeed there have been days when it has drifted below again. However, since it has taken 15 years to regain the position it held at the end of 1999 investors should perhaps be grateful it has least challenged this totemic hurdle, especially given the many political uncertainties capital markets currently face.
It is important to point out though that anyone invested in this index over that time period would have made a total return, before costs, of about 70%. Despite the index ending the period at the same level it started at equity investors would have benefitted from a steady stream of dividends that, if reinvested, would have delivered a substantial gain.
Nevertheless, it is clear from the levels of transactions in and out of the fund over the last few months that many investors have taken the opportunity to sell some investments as the capital index regained its previous high. One of the many, and arguably misleading, myths about investing is that it is never wrong to take a profit. If funds are required for a specific purpose of course it makes perfect sense to realise cash. But if the motive is simply to lock in a profit it immediately raises some questions; how much is really profit, what to do with the cash and when to reinvest it? With interest rates at historically low levels on cash and bonds none of the alternatives look appealing. On top of that timing investment back into the stock market is just as tricky as timing an exit.
The alternative option of just letting your investments run can be difficult, but an excellent demonstration of why it makes sense was recently provided by a 92 year old American janitor. When he died Ronald Read left an estate worth $8m, yet this WWII veteran only ever worked in a garage and as a caretaker in a local store. He rarely traded his shares, preferring to reinvest the dividends he received from his portfolio of 95 blue chip high dividend paying companies. That way dividends, the increase of those dividends, the reinvestment of those dividends and the compound interest on all three allowed his portfolio to accumulate into a very substantial pot despite the trials and tribulations of the capital markets.
It would seem he didn’t pay too much attention to the levels of the stock market indices over that long period.
For anyone who can stomach the short term volatility of the stock market it can be rewarding in the long term. Doing nothing isn’t easy, especially in the modern news driven world, but if the temptation to trade can be avoided it can be the more profitable strategy.