In honour of the reformed Pythons this report will examine the markets and portfolio performance.
In the interest of full disclosure, it was written whilst wearing women’s clothing and having buttered scones for tea.
Start of 2014
At the beginning of the year the consensus amongst those that purport ‘to know’ was that.
- Interest rates would rise. WRONG
- Bonds would fall. WRONG
- Equities would continue their strong gains in Europe. WRONG
- Japan would keep rising. WRONG
- Emerging markets would fall. WRONG
In fact for pretty much everything predicted for the first six months, the opposite happened.
Best and worst
Property (which had done badly in 2013) was the best global asset class followed by high yield bonds, sovereigns, Asia and North America.
The worst performing markets were Japan, Europe and the UK.
Knowing what we know
This really isn’t a surprise; in fact it’s obvious if you think about it.
If it were possible for anyone to predict consistently what will happen then they would be richer than everyone else by a lot.
In fact the people making the predictions are salaried employees of financial services companies, well paid for sure but only because they are good at sounding knowledgeable.
The only people who have accumulated and retained great wealth are those that don’t profess to know what will happen over short time frames, but who are disciplined about identifying highly favourable long term probabilities.
This is the reason the portfolios are constructed as they are, because over shorter time scales we have no idea what will happen.
This is not a negative thing; this does not make it impossible to successfully invest.
In fact quite the opposite, by knowing and being upfront about what can’t be known, we can then concentrate on what we can know and work out how to make it profitable.
George has prepared the following figures which illustrate the performance of the UK funds we have in the portfolio against the UK All Share Index.
The figures are based on the holdings in the Balanced Portfolio between 1 January 2009 and 30 June 2014.
£100,000 invested equally between the UK holdings in the portfolio would have delivered a return of 160.43%, or in monetary terms the value of the fund would have been £260,430.
Investing in the FTSE All Share Index the return was 92.43% or a return in monetary terms of £192,430 meaning the funds delivered 68% outperformance of the All Share Index.
Apples to apples
For clients with personal holdings in UK shares in 2013 these will likely have done better on average than the growth of an LWM portfolio.
This will sometimes happen because (in 2013 as an example) the UK market was strong and other parts of the portfolios less so (property, commodities etc).
The apples to apples comparison however is not a diversified portfolio against UK shares but rather the UK portion of the portfolio against UK shares. In 2013 the UK portion of the portfolio returned 35% this compares to the All Share Index return of 20%, this equates to 75% outperformance.
Most investment companies will market their best performing fund over the previous 1-3 years because they know people will see the success and be attracted to invest.
However there is a fundamental flaw to doing so.
If the value has risen by say 50% this makes the likelihood for future returns much less promising. It would be like buying a can of Coke after the majority of the contents had already been consumed.
What investors should want are advisors who say; ‘this has done terribly, the values are shot to pieces, buy it now, the price is very attractive.’
That’s like buying a six pack for the price of one can.
Amazing but true
One of the more successful investment strategies over the last 30 years would have been to switch funds into the worst performing sector of the previous twelve months, fact.
One of the worst strategies, yep, switching the funds into the best performing over the previous twelve months.
The reason most people don’t make money consistently is that successful investing requires a set of contra-intuitive behaviours to be practiced consistently.
All we have done is research the methods of those few investors who have proven themselves perennial winners and copied them.
It’s not easy, it often feels wrong and it is the practice of incremental gains which over time accumulate with the aid of compound interest to sums of significance.
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.