With all the ‘noise’ generated by political and macro events, it’s sometimes hard to see clearly when it comes to investing.
There always seems to be something to worry about, but that hasn’t stopped shares outperforming all other major asset classes over the long haul.
Going back to a more youthful me
Successful investors such as Warren Buffett have done well investing through all kinds of worrisome times, so if you’re thinking about investing in shares, right now is as good a time as any.
I’ve been investing in shares on the stock market for around 20 years, but if I could wind back my age and start again with just £10,000, I’d go about it a little differently. For example, I think one of the most damaging philosophies in investing is the idea that the young can afford to take on more risk because they have time for their funds to recover if things go wrong.
The laws of compounding mean that losses early on in your investing career can cost you dearly in later life. When I read Warren Buffett’s autobiography The Snowball, I realised how obsessive he had been about making every dollar work hard for him throughout his life. He always knew that a dollar he owned could compound into many hundreds of dollars later if he invested it wisely, and a dollar he lost wouldn’t compound into anything. To him, losing a dollar was like losing the hundreds of dollars it would have become and he, no doubt, felt the pain of that loss accordingly.
Watching the downside with compounding
So a rebooted younger me would watch the downside much more carefully in an effort to avoid losses before anything else. To do that, I would focus on compounding above other things and not on growth or value or any other strategy. Well-known outperforming fund manager Neil Woodford does that. His biggest concern is the reliability of the dividend payments his investee firms can offer and how much potential they have to keep raising the dividend payout year after year. He seems to consider any capital growth he sees from share prices going up as a bonus.
I would go for defensive growing businesses with my £10,000 with the aim of holding on to my shares for the long haul and reinvesting all the dividends back into those firms at opportune times, such as when the stock market pulls back. I see defensives as on the opposite side of the investing spectrum from cyclicals and more likely to be able to keep up dividend payments whatever the economic weather. Defensive businesses are among the least affected by macroeconomic events such as recessions and you can find them in sectors such as pharmaceuticals, utilities and consumer goods like detergents, foods, tobacco and alcohol.
To keep trading costs and portfolio management time down I’d probably invest my £10,000 in four firms diversified across defensive sectors, but without straying into cyclicals such as banks, housebuilders and commodity firms, no matter how attractive their dividend payments looked. Having done that, I’d adopt a long-term, business ownership mindset, repeating the entire process every time I had new money to invest.