After the return of volatility to global stock markets with last month’s mass share sell-off, the temptation for nervy investors to abandon their investing strategy in favour of safer options is growing.
But data suggest that sticking with an existing strategy, or investing in a range of strategies, is the best option to secure long-term returns.
Panicking and jumping at the wrong moment into a strategy that appears to be performing better can, in fact, severely damage a portfolio.
Richard Maitland, of fund manager Sarasin, said: “While there are a multitude of different approaches to generating attractive long-term returns, two particular styles stand out.”
The first, he said, involves investing 70pc to 85pc in shares, with a small amount in bonds, and some money in property and other alternatives such as infrastructure. This involves substantial risk, but will hopefully deliver long-term growth from the shares.
“Investors who take this approach tend to be more sceptical about anyone’s ability to time markets, and accept that volatility and the odd sharp sell-off is the price they must pay for long-term returns,” he said.
The second is investing to avoid sharp drops. This involves investing 30pc to 70pc in shares, with the rest put in other assets including bonds and gold, and changing asset weightings depending on concerns about markets.
“Investors in these funds either believe that managers can successfully time markets, or think a widely diversified portfolio can make steady upward progress at all times,” said Mr Maitland.
The chart, below, taken from Sarasin’s latest Compendium of Investment, published this month, compares the performance of two examples of professionally run portfolios representing each category since 2006.
The strategy geared more towards protecting investors from falls – the second one outlined above – has a more stable ride. But in the run-up to 2008, the first (growth-focused) strategy was soaring ahead, while the protection strategy was largely flat.
Any investor following a protection-focused strategy who felt they were missing out, and switched to a growth strategy, would have suffered disastrous consequences.
Between December 2005 and April 2007, the growth strategy gained 23pc, while the protection strategy remained almost flat. But between July 2007 and July 2008, the growth portfolio fell 23pc, while the protection portfolio gained 5pc.
An investor who switched at the wrong time would have missed the 23pc gain, then suffered the 23pc fall. The same is true in reverse.
Following the 2008 crash, it would have been tempting for a growth investor to switch to a protection strategy that had delivered a positive return during the crisis. But from the 2008 low point to the present day, the growth portfolio rose more quickly.
“The worst returns are likely to be achieved by those who don’t really know what they have bought, who as a result, chop and change between styles based solely on recent investment performance,” said Mr Maitland.
Of course, an investor who timed their move from growth to protection and back again perfectly during the financial crisis would have done best of all. But timing such a move is next to impossible.
Ben Willis, of investment manager Whitechurch Securities, said: “If you invest in just one strategy and hope to time your exit into the next popular investment strategy, you can be assured that there will be times when you get it horribly wrong.”
It is “much more prudent and pragmatic” to hold a mix of strategies, as it is a “tried and tested method of reducing risk”.
This can be achieved by building a portfolio containing a mixture of funds run by managers with different investing philosophies. Head to telegraph.co.uk/go/25funds to see our top fund picks.
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