The foundation of any long-term investment strategy is the ability to earn returns in excess of inflation.
If we take historical experience as the best guide to the future, it becomes clear that the biggest driver of investment success is the decision as to how a portfolio should be divided amongst the main asset classes.
Equities Beat Inflation Over the Long-term
The fact is that the best way to achieve long-term inflation beating returns is to invest in equities, or shares in the world’s greatest companies. This has been proven by history, and our faith in human ingenuity leads us to expect that this wont change over future decades.
By becoming the owner of a small share in the biggest and most innovative businesses in the world, you get the opportunity to share in their long-term success.
That is a marvellous thing if you think about it!
And the great news is that, due to innovation in the capital markets over the last decade, it has never been easier or cheaper to invest in a diversified portfolio of shares in the most dynamic businesses across the globe.
However, there is one cost of owning shares that will never be altered: the volatility of the stock market.
History has taught us that enduring the regular volatility of the stock market is the price of admission for anyone wanting to accumulate long-term wealth over multiple generations.
This fact is not openly discussed by those who sell financial products as, to the ill-informed, it can be seen as a barrier to investing.
But a financially educated person must understand that accepting this characteristic of the financial markets is the ‘price’ that must be paid to share in the long-term success of the world’s most innovative and ingenious companies.
Volatility is a Feature Not a Fault
The good news is that the volatility experienced by a diversified portfolio is temporary but the long-term gains it will enjoy are permanent.
Any investor who truly wants to build and protect their wealth over the long term must accept this trade-off. But the key to accepting short-term volatility is to have realistic expectations and to understand that sudden downturns and upturns are merely corrections in pricing, and that they happen every day.
The chart below shows just how frequently markets and investors can be rattled.
Falls and rises of over 10%, and negative headlines are remarkably frequent. But how does this help us as investors?
Firstly, we need to ensure that our long and short-term expectations are realistic.
Secondly, we need to be honest about whether we can accept that volatility is the price we must pay for the best long-term returns.
A portfolio that is spread across less volatile asset classes such as bonds or cash will experience less and smaller downturns, but this will come at the expense of real long-term, inflation beating, returns.
As Warren Buffett says. “The stock market is there to serve you and not to instruct you.”
And our mission is to understand your goals and guide you through the process of creating a portfolio that meets your long-term aspirations. At the same time, we will help you to make the right short-term decisions so that, when the inevitable downturns happen, you won’t let volatility deter you from your long-term plans.
