Mid-year letter to our clients

Dear valued client,

I’m writing this on 19 July – so-called Freedom Day – which now does feel as though we are at the ‘beginning of the end’ rather than the ‘end of the beginning’ in COVID-19.

Rather than focus on every single concern and worry, which I will leave to the press, if we step back and look at the big picture and trajectory, I am happy to say things are certainly improving, and should continue to do so over the next few months. The UK economy is on the mend and global stock markets have had a good run and are close to all-time highs in the US, whilst approaching that level in the UK.

I wanted to write this mid-year letter for a couple of reasons. First is a brief recap of our shared investment philosophy; second is my perspective on the current situation. As always, I welcome your questions/ comments.

General Principles

You and I are long-term, goal-focused, planning-driven investors. We have a natural equity bias due to the historical growth profile. We’ve found that the best course for us is to formulate a financial plan – and to build portfolios – based not on a view of the current situation in the economy or markets, but on our most important lifetime financial goals.

Since 1986, if you had invested £10,000 in the FTSE All-Share Index AND re-invested the dividends, your investment would now be worth around £196,000. If you had invested the same amount into the S&P 500, your investment would be worth around £392,000. Even when adjusting for inflation, the returns are around £79,000 and £158,000 respectively.

Historically, mainstream equities have functioned as an extremely efficient hedge against long-term inflation and a generator of real wealth over time. We believe this is more likely than not to continue.

We focus on three key areas: Plan, Risk and Invest.

We believe all of these work symbiotically to create a fully comprehensive financial plan. Each of these has individual components which we work through together and all support and reinforce the other.

We believe that acting continuously on a rational plan – as distinctly opposed to reacting to current events – offers us the best chance of long-term investment success.

Simply stated: unless our goals change, we see little reason to alter our financial plan. And if the portfolio is well-suited to that plan, we don’t often make significant changes to that, either.

Where we do act continuously are on the so-called little things: topping up ISAs and pensions, switching to cheaper funds, being as tax-efficient as possible each year. These little things work together and compound over the years to make a large, positive contribution to our overall wealth.

Current observations

The global economy continued its dramatic recovery in the first half of 2021, spurred by:

a) the proliferation of effective vaccines against COVID-19 and the retreat of the pandemic

b) the massive monetary and fiscal accommodation, and

c) its own deep fundamental resilience, which ought never to be underestimated.

The global economy does continue to struggle with supply chain imbalances, as well as with a historic mismatch between the number of jobs available and continued high (but declining) unemployment. The over-arching cause is the continued rapidly advancing skills required when compared to the ‘old way’ of working. This will be painful for some, but we believe will resolve itself over time. Contrary to popular thought, technological change has only ever brought about an INCREASE in the future number of jobs available.

We are still in the middle of an unprecedented (that word again) experiment in both fiscal and monetary policy. The enormous liquidity pumped into financial markets has no doubt served to push them higher. It remains a question that when (or indeed if) this liquidity is withdrawn, what impact that will have on markets. If negative, history guides us it will only be short-term.

This enormous liquidity expansion also potentially brings into play another major factor: inflation.

In 2008, a similar expansion caused asset price inflation through house prices and equities, but didn’t drift into either CPI or wages.

So far in 2021, we are seeing both house prices and equities take off again but also this time, CPI has moved higher and we are hearing reports of some wage increases. However, and I’m not sure if this is reassuring or not, global Central Bankers are convinced these price increases will not last and are “transitory”.

We will wait to see the ultimate answer, but in the meantime, continually holding real assets – property, equities, companies – offers the best protection for your wealth.

On 23 March 2020, as we went into the first lockdown here in the UK, I hosted a webinar for clients where we looked at the precipitous market falls at the time and discussed what actions we should take. The answer then, and which is normally the case – was we should do nothing.

Those that listened and trusted our process have been significantly (and rightly so) rewarded for their trust.

However we are not patting ourselves on the back, because one thing I can assure you, is that it will happen again, and again, and again over our investing journey.

I go back to the great investor Peter Lynch’s line: “The real key to making money in stocks is not to get scared out of them.”

And that is what I am here to help you with.

Thank you for being our client and I look forward to seeing you soon.

Yours sincerely,