Here at the Motley Fool we trumpet the merits of long-term investing in the stock market. This is because equities outperform other major asset classes over long periods of time. As such, the stock market offers the best prospects of growing your wealth and achieving financial independence.
The price you pay for the stock markets superior long-term rewards is dips and occasional crashes in the value of your investment. Indeed, as legendary investor Warren Buffett has said: You shouldnt own common stocks if a 50% decrease in their value in a short period of time would cause you acute distress.
If you cant stomach this level of volatility, but are equally distressed by seeing the value of your cash savings gradually eroded over time by inflation, there are ways you can still grow your wealth effectively.With this in mind, Id be happy to buy shares in Ruffer Investment Company (LSE: RICA) andCapital Gearing Trust (LSE: CGT) today.
These two investment trusts have similar objectives. Ruffer Investment aimsto achieve a positive total annual return, after all expenses, of at least twice the Bank of England Bank Rate.Capital Gearing wantsto preserve shareholders real wealth and to achieve absolute total return over the medium-to-longer term.
It hasnt been a good year for the stock market so far. The table below shows the year-to-date performance of the FTSE 100and the two investment trusts.
|Year-to-date return (%)|
As you can see, both trusts have outperformed the Footsie, with Capital Gearing even managing to deliver a positive return. But what about when the stock market suffers a real meltdown?
Between 15/6/07 and 3/3/09 the FTSE 100 dropped a massive 47.8%. Over this same period, Ruffer actually gained 31% and Capital advanced 13.4%. However, the two trusts did experience declines ahead of and through the early part of the Footsie bear market. But these were relatively mild. Ruffers peak-to-trough decline was 14.7% (2/5/06 to 13/8/07) and Capitals was 12.9% (28/12/06 to 31/10/08).
Furthermore, an investor holding both trusts would have seen only single-digit falls. During the period of Ruffers 14.7% decline, Capital dipped a mere 3.1%, giving an average fall of 8.9%. During the period of Capitals 12.9% decline, Ruffer gained8.4%, giving an average fall of just 2.3%.
The trusts have delivered excellent downside protection relative to the FTSE 100, but what of growth? The table below shows 10-year annualised total returns (capital growth plus dividends) for the index and the two trusts.
|10-year total return annualised (%)|
As you can see, Capital and Ruffer have delivered very decent returns (well ahead of inflation), but have lagged the return of the FTSE 100. Because they have one eye on protecting against downside risk, the trusts will never fully participate in the kind of equities bull run weve seen over the last 10 years. Currently, both have less than half their assets in equities. They have around a third in index-linked gilts and the remainder in cash, gold and various other assets.
Despite their similar objectives, Ruffers and Capitals allocations to different asset classes, individual holdings within those classes and the performance of their share prices do differ to a greater or lesser degree at any one time. As such, I see merit in holding both trusts.
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