This morning’s results shocker from insurance to cruises group Saga showed that, when it comes to individual shares, the only certainty is uncertainty. The shares fell by more than 30% after the company issued its second profits warning in just over a year.
Until today’s announcement, an optimistic investor could have pretended that the company’s 8% yield was an acceptable reward for the challenges we knew the company was facing. Very high dividend yields like this generally sound alarm bells, however, and so it proved with Saga. The dividend was cut in half this morning.
That might have been predictable. Caution is called for when a yield rises above 6% or so. What was less predictable was the £310m hit to Saga’s balance sheet as the company accepted that its insurance business is worth less than it thought.
For a business targeting a demographic that prefers no surprises, this was a disastrous results statement.
It might feel like investors have a surfeit of uncertainty today. Those of us who can still bear to mention the B-word have reached the stage of rolling our eyes and admitting that we haven’t a clue how Brexit will pan out.
Wherever you look, there’s uncertainty hanging over your investments. Will the Federal Reserve raise interest rates this year? Can China and the US thrash out a compromise that avoids a damaging hike in trade tariffs? Can Donald Trump twist Saudi Arabia’s arm to keep the oil price at a manageable level?
It may feel like these are particularly uncertain times, but the reality is that investors have always had to deal with a lack of clarity. Uncertainty goes with the territory.
The good news is that investors have always been rewarded for living with a cloudy outlook. There’s even a technical term for the extra return that investors in shares expect to receive - the ‘equity risk premium’.
This is why shares have delivered reliably better income and capital growth than safer bonds and cash - over the long haul, if not in the short-term. If they did not, no sensible person would invest in the stock market. They would all put their money in the safe haven of fixed income and deposit accounts.
So, it’s worth remembering that amid the uncertainty there are certain truths that we can hang onto as investors. Here are my top two:
- In the long-run risk has been rewarded. In the short-term shares may be more volatile than other assets but for anyone prepared to put their money to work for an extended period the stock market should be the best place for your money, although there are, of course, no guarantees that this will continue to be the case.
- A diversified portfolio will protect you from the ups and downs of individual investments. To take an extreme example, an investor who held nothing but Saga shares in their portfolio would this morning be 30% poorer than they were yesterday. If Saga were just one holding in a portfolio spread across a range of UK shares, the hit would be negligible. Assuming that the UK represented just one part of a geographically diverse portfolio, the damage would be even more manageable.
The performance of your underlying investments may not be predictable but other features of your investment strategy can be relied on. The most important of these on 4 April 2019 is the fact that tomorrow at midnight your right to invest up to £20,000 in a tax-advantaged ISA will expire.
Tomorrow is the end of the tax-year and that means that if you don’t take advantage of this generous investment tax break, it will be gone forever. It’s a use it or lose it allowance.
Don’t forget, too, that ISA stands for Individual Savings Accounts. The first word is important. You and your partner and your adult children can all invest £20,000 a year in an ISA. For all but the very lucky few that means that all of our savings can be sheltered from tax.
There’s just over a day to go. Just saying….
More on Tom’s ISA fund picks for 2019
Tom Stevenson will be speaking at the Master Investor Show in London this Saturday 6 April.
Five year performance
As at 3 April
Past performance is not a reliable indicator of future returns
Source: F.E, as at 3.4.19, in GBP with income reinvested
Investment Pulse email
Sign-up to receive daily investment news and insights
Thank you. We've emailed you to confirm your subscription.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.