Why invest at all?

This is a very good question. Should a 30 year old with a large mortgage be investing for long-term capital growth or should he overpay his mortgage to reduce his debt burden? Does it make sense for a wealthy 80 year old to invest when his capital and any gains he makes will be taxed at 40% when he dies? Would he be better served by making gifts to his loved ones as part of an Inheritance Tax mitigation strategy (assuming he still has sufficient to live off)?

Whilst it is appropriate for most clients to have some sort of exposure to ‘the markets’, this is not true in all cases. Our fee based charging structure does not steer our clients down one strategy or another.

Does investment pay?

Once we have ascertained whether or not a client should have an investment portfolio, the question we usually face as advisors is “which way is the stockmarket heading?” Whilst we all have our own opinions on this matter, no one actually knows. However, we do subscribe to the view that as we are living in a capitalist society, individuals are rewarded over the longer term by the market rate of return for providing finance to companies. If this was not the case, capitalism as an economic system would have collapsed long ago.

This basic belief is born out by the figures. The 54th Edition of the Barclays Equity - Gilt Study 2009 shows that over the last 109 years, UK equity returns have averaged 4.9% over inflation. This compares to a return for gilts over the same period of 1.2% over inflation and only 1% for cash

The table below from the same study bears out the same picture even more clearly. Over the longer term, equities have far outperformed other asset classes, even when taking into account major market corrections such as those in the early 1930s, 1973-1974, 2000-2002 as well as the falls in 2008.

It is interesting to note that when five year annualised returns of the FTSE All-Share index are looked at from 1956-2007, there are only 4 five year time periods out of a total of 48 when returns were negative. These were in the early 1970’s in the secondary banking crisis and again at the turn of the century with the bursting of the technology bubble. If after the 1970-1974 slump investors had kept their cool, they would have been rewarded with a rise of 151% in 1975.

At Evolve we do not try to predict the market direction because we believe this to be virtually impossible to achieve with any regularity. However, we do hold some comfort from knowing that the long term figures support the argument for a structured approach to stock market investment.

Direct versus collective investment

Once we have decided that investing part of your wealth is a sensible course of action, we need to decide whether it should be placed in individual stocks and shares or in collective funds, such as unit trusts.

We have reviewed the advantages of each method of accessing assets and conclude that there is no reason to invest in equities directly and that in most cases the same is true for fixed interest securities. It is virtually impossible to deliver a tax-efficient, suitably diversified portfolio at a low cost through direct equity investment. We believe that funds such as unit trusts, open ended investment companies (OEICs) and exchange traded funds (ETFs), offer a more attractive means of accessing the global financial markets. We therefore exclusively use collective funds for our core portfolios.