THE other day, somebody from the City phoned to ask what cash funds I'd recommend, given that investors don't want to own shares any more. An hour later, another researcher phoned to say cash individual savings account (Isas) were outselling equity based maxi Isas three to one this year, and what did I think about that?
It's the same in the United States. Investors have built up cash funds 50 per cent higher than they were five years ago. That was arguably the best time in a decade to buy equities.
It's something I've noticed over the years. Private investors
mis-read the signals. After stock-market falls creating big bargains, few private investors want to know, preferring the apparent safety of cash.
"But is there a time when holding deposits for the long haul does make sense?" asked the first chappie. "Not in my experience," is my response. I look at deposits as a harbour. The obvious place for a yacht is the open sea and that's where it should spend most of its time. However, now and again big storms come along and you shelter in the harbour. The storm clears and you get out again.
Obviously, it makes sense to have some cash on the sidelines. But the key to proper investment is patience, judging success over periods of at least three to five years.
Cash isn't an investment. An investment should be capable of tax-efficient growth and income – that rises year by year. Cash doesn't do that. It is especially ineffective for high-rate taxpayers, and it doesn't cope well with inflation.
So if you're in cash, getting 6 per cent, and you're a 40 per cent taxpayer, you're only receiving 3.6 per cent net. Factor in inflation and you're standing still.
I introduce new clients to the "magic number" of 72. Take your net return every year – that's after tax – divide it into 72, and it tells you how many years it will take to double your money. In the above example, high rate taxpayers will wait 20 years to double their money. And that ignores inflation's negative impact.
Push total returns up to 14 per cent and you're doubling your money every five years. In this example, after 20 years you've got eight times the sum accumulated in deposit. And a more prosperous retirement to boot.
But where does that 14 per cent come from? Well, it's not as difficult as it looks.
Most people have heard of Warren Buffett. However, you may not have heard of Benjamin Graham. To value managers he's known as the "father of value investing" and was a mentor of Buffett. Buffett learned the tricks of the trade from Graham.
There are disciples dotted around the globe following Graham's methods. They, like him, invest in good solid businesses, with strong dividend yields and excellent returns on capital.
Value-style investment managers right now are like bairns in a sweetie shop. The most successful US hedge fund manager, Joe Greenblatt, has produced 40 per cent annualised returns per annum to his clients since 1985 using Graham's value approach. In this country, Neil Woodford's Invesco Perpetual High Income Fund has been doubling long -term investors' money every five years, for the best part of 30 years now.
Of course, as they always say, this time it could be different. And that's what investors were saying back in 1994 when those who bought Neil Woodford's fund in the early part of that year were down 20 per cent, in circumstances uncannily similar. But those who kept the faith were well rewarded.
The average per annum return since has doubled the wealth of patient high income unit holders every four years. So get out of the harbour. It's brightening up!
• Alan Steel is chairman of Alan Steel Asset Management.
The full article contains 647 words and appears in The Scotsman newspaper.
