George Martineau: Why doing nothing is sometimes the best investment strategy

It is small wonder, then, that two of the most frequent questions I get asked are: ‘what should I do with my money given all the political uncertainty?’ and ‘how should I position my investments given the market volatility?’.

If there is anything that the recent political events have taught us, though, it is not to try to second guess what will happen.

Basing financial decisions on what might happen is, after all, a dangerous game for any investor to play.

For example, you may be thinking about whether you should take all of your tax-free cash from your pension now in the event of a Jeremy Corbyn government, which may be more likely to tinker with the current pension tax relief system.

However, as the recent live debate has shown, it’s hard to predict which party will come out on top let alone predict what a Corbyn government might or might not do with pension tax relief.

With this in mind, it really doesn’t make sense to make knee-jerk financial decisions based on what might happen as this could have a significant impact on your future financial plans and goals. Instead, it’s far more sensible to wait things out until there is more clarity.

In the meantime, however, it continues to make sense to make full use of the various allowances that are available to you, whether that’s in a pension or ISA.

If and when things do change, then of course, you should review your financial plans and if required seek expert advice.

Markets are volatile. They move up and down. They always have and they always will.

Whenever markets fall, commentators concoct stories to explain exactly why they’ve fallen – stories that are often alarming, with little basis in fact.

It is therefore usually best to ignore the headlines and focus on the long-term rather than trying to react to market movements.

Indeed, there’s an age-old stock market adage that suggests time in the market is far more effective than timing the market.

While many stock market adages should be taken with a pinch of salt, this one certainly has more than a grain of truth to it.

No one I know has perfectly executed the strategy to sell at the very height of the market and buy at its very lowest point even a couple of times, let alone achieve that multiple times over the long term.

It becomes even more complicated when you appreciate that some of the stock markets’ best days often happen very soon after some of the very worst days that that same market can record.

Instead of trying to time the market, which is a fool’s errand, a far more effective strategy for wealth creation is to stay invested for the long term.

By doing so, you will benefit from the phenomenal power of compounding, which Albert Einstein (allegedly) described as “the eighth wonder of the world”.

To give you an idea of how powerful the magic of compounding can be, an oft-cited statistic among investors is that if the money you invest achieves an annualised 7 per cent per annum, it should double every 10 years.

To really supercharge your returns over the long term, it’s worth reinvesting any dividends from your investments if you don’t require the income.

For example, if you invested £1,000 nearly 60 years ago in the FTSE All Share and chose not to reinvest the dividends, you could have £39,860.

However, if you had reinvested the dividends over that same period, then you could now be sitting on £86,104 – quite a difference.

The critical component here is time. And the longer that your money has to work for you and the longer you leave it untouched, the more pronounced the power of compounding is.

So despite the temptation to tinker with your savings or your portfolio amidst all the political noise and market gyrations, the answer to the most frequent questions I currently get asked is often to do nothing.

If you’re ever unsure, however, then it pays to seek professional advice.

George Martineau is head of financial planning at 7IM.