Investment management - The importance of a long term vision

This is a time of increased volatility in world stock markets and being focused on a long term investment management strategy isn’t always easy.

By Glynn Bartley, Taylor Patterson.

However, when you consider the performance of major asset classes over the long term some key philosophies can help investors keep long term investment success clearly in sight.

Building an investment strategy aligned to an appropriate risk profile provides a solid platform for investors to achieve their goals and expectations. Research shows that the key to long term investment performance is effective asset allocation with less focus on market timing or stock selection. Market cycles play out against a backdrop of economic, social and political change and many investors become tempted to react to every turn of events.

Markets are unpredictable and trying to time them means investors must get two important decisions right: when to get out and when to get back in. Historical market returns show that investors who remain invested often do better than those reacting to every event.

Diversification can help reduce volatility and smooth out returns over time. This often starts by investing across asset classes and also by investing in different companies, industries and countries. Whilst this strategy does not protect a portfolio against negative returns, it does reduce the impact of poorly performing asset classes.

By overlaying an effective asset allocation with tactical investment decisions volatility can be further reduced. This is where a portfolio goes under or overweight in a particular asset class or sector depending on the outlook. For example, most portfolios will be limiting exposure to UK government gilts as they are particularly sensitive to interest rate movements and any increase can adversely affect prices.

There are a few basic rules to investing in volatile markets, where you need to raise cash in the near term, consider doing this sooner rather than later; where you are considering investing cash then consider spreading the investments over a period of time. Both actions guard against you losing out should markets move against you in the short term. This may appear overly protective but it has been proven that investors react more from losing value than gaining it through investments.

Therefore, it is important for investors to protect their downside even if it means missing out on some of the upside. According to Bloomberg, the VIX index, often referred to as the fear index, measures the implied volatility of the S&P 500 index options in the US. Although, volatility has been increasing it is still relatively low. This is a similar story in the other major markets all wary of the risks to economic recovery from events in the Ukraine, the Middle East and the likely impact of rising interest rates. At Taylor Patterson, our investment management strategy is designed to capture the long term returns expected from investment markets whilst balancing, understanding and mitigating the risk that volatility can cause discomfort in the short term.