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Four common sense strategies for long-term investors

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24/04/2014
Rob Morgan, an analyst at Charles Stanley, says investors with a long-term time horizon should try to resist reacting to market noise.

In this digital age investors are constantly bombarded with reasons to buy, sell or otherwise tinker with investments. That’s fine for short term traders, but for longer term investors resisting the temptation to make changes can often be the best strategy.

Below I outline four common sense strategies for investors who want to shut out the market noise and remain “hands off” but successful investors.

Allow compound interest to work its magic

If you allow it time, the power of compound interest (earning interest on interest on interest), can work wonders. The principle is simple: Buy assets that produce an income and keep reinvesting that income in more income-producing assets. Over the years it can mean your wealth grows substantially, especially if the income stream itself grows.

This approach can work for any income-producing asset, but our favourite is equity income – dividend producing shares. Over time companies can grow their profits and increase pay outs to investors. Continually harvesting and reinvesting this income can lead to superb returns if you select the right stocks for the long term. Rather than pick them yourself, buying an equity income fund can do this for you.

Buy “inevitables”

Invest in good quality businesses and time is on your side. Invest in a poor quality one and it isn’t. Certain businesses have what renowned investor Warren Buffett describes as an “economic moat” around them. For instance, offering a unique proposition, dominating market share through a superior product or unparalleled channels of distribution.

In these circumstances it is hard for newcomers to penetrate the market, so the strong are likely to get stronger. These are often large, mature businesses that can seem boring but they can also make great “buy and lock away” investments. If you would prefer not select shares yourself one fund that follows this philosophy is CF Lindsell Train UK Equity, a constituent of our Foundation Fundlist.

Let the manager take the strain

Most fund managers remain “fully invested” in their respective areas of interest, say UK equities or corporate bonds – and building a diverse portfolio of such investments can provide excellent returns over the long term. However, there are a growing number of funds that take a more active approach meaning you can also leave market timing decisions to fund managers as well – though there is no guarantee they will get them right.

One manager we admire in this regard is William Littlewood, manager of the Artemis Strategic Assets fund, also part of our Foundation Fundlist. He adopts a flexible strategy of combining a variety of assets including equities, bonds, commodities and currencies as well as using cash tactically.

Invest regularly

Another way to counter market ups and downs is to invest money at regular intervals, say once a month, rather than a lump sum in one go. No one can precisely call the market tops and bottoms, so the advantage of dripping money into the market is that you don’t need to worry that you are putting all your money in at the peak.

In fact the strategy can often turn market volatility to your advantage and is a sensible way of investing in more risky areas.

Rob Morgan is pension and investments analyst at Charles Stanley Direct

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