The wall of worry can be mitigated by good planning

The wall of worry is a term used in investing circles to describe a set of concerns faced by anyone deploying risk capital.

Any investor in equities for example has a myriad of issues to fret about. North Korea and Brexit are two of the current favourites but others exist too. High valuation multiples, ultra low interest rates and volatile exchange rates are also items to ponder when making investment decisions.

Actually spending hard-earned money to acquire assets in these circumstances is known as climbing the wall of worry. Having the bottle to commit cash to buying any asset — be it property, bonds or shares in companies — is a brave action in any circumstances. If done well, it can generate material gains that help build real value for investors over time.

This week, one of the bricks in the wall of worry was removed with the first stage of the French election. By electing a moderate to run against the far right, the French people have set up a contest that is highly likely to return a pro-European to the presidential office.

Equities responded well as the market began to feel confident that a more rational approach will be taken to developing Europe. The decision to start an election campaign in the UK is being interpreted with similar optimism. If the Conservatives win a decisive vote, and the Liberal Democrats form a sizeable but coherent anti-hard Brexit minority, the chances of an orderly EU exit by the UK increases.

Despite all of the geopolitical drama that has unfolded in recent times, equity markets are close to — if not above — all-time highs. That is some result compared to the state of affairs just eight years ago in the aftermath of the global financial crisis.

At that time, a number of commentators were shouting to keep all of your money in hard cash or gold as the world apparently fell apart. Those unfortunate enough to follow that advice have generated miserly returns in the ensuing eight years, barely keeping pace with tepid inflation. The Irish stock exchange index is up 210% in the same period and many of its constituent companies have done even better.

The UK investing guru Terry Smith wrote an insightful article recently that helped explain the value of equities as an asset class. In contrast to cash, property or bonds shares in a company give investors access to two key streams of value. Typically, cash dividends provide the regular tangible return.

Well-managed companies also retain a share of their annual profits to reinvest into the business to create greater future value that can in turn support higher dividend payments. The key challenge for investors is to identify those companies that consistently deliver on dividend promises and returns on capital. If their dividends are reliable and the return of capital exceeds the cost of that capital, investors are the primary beneficiaries over the longer term.

Of course, share prices are always volatile and we have just entered the eighth year of a tremendous bull run in equities. Markets, history tells us, go up and down, so although neither I or anyone else can predict when, it is almost inevitable that equities will decline at a future date. Investors in these circumstances need to be sure footed. If the portfolio of companies you invest in can display an ability to navigate choppy economies, then any share price fall as part of a general market weakness should be seized upon to buy more shares for less money.

This “dollar average investing” approach, which requires guts when things get tough, pays off handsomely over the longer term if executed well. In the current state of the equity market, I would encourage all investors to ensure their portfolios are centred with companies that take their obligations to reward shareholders consistently very seriously indeed. That will help avoid sleepless nights and gives you a strong enough ladder to climb the next wall of worry.

Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal.