The last quarter update focused on the rollercoaster ride investors have endured this year (and how history is littered with similar events).
At all times we aim to ignore the hysteria, focus on long term investing and help deliver individual goals.
Much of the events during June, August and September 2015 were driven by irrational behaviour.
And then there was October
Never focus on the short term!
October responded in a way we suspected it would. The irrational fear which drove down the market created opportunities (certain parts of the market were oversold). And then for no rational reason, the irrational investors suddenly started to invest again.
Investors seem to have forgotten that the worries which dragged down the markets remain; Greece, China and the US Interest Rates. Nothing has changed (except sentiment), just everything has got that little bit cheaper.
Taking a look at the history of the portfolios; in 2011 and 2013 we had sharp corrections in prices in October following sharp falls earlier in the year.
2015 has repeated that pattern.
The rises were not at the same level as those in 2011 but they were higher than 2013; ranging from 3.64% to 5.22%; with the biggest beneficiaries being the more adventurous portfolios.
The tricky bit is what may happen in November and December, and as I have no insight to the future I can only turn to the past.
The returns in 2011 and 2013 were effectively flat for the remaining two months of the year. There is an argument that if history repeats, then the returns we are at now should provide an indication of what to expect for the year.
This is perhaps a wild guess but the 12 months of 2011 were very different to now, there was a real fear then that Europe (as we know it) could collapse. Equally 2013 was very different. So perhaps 2011 and 2013 can’t tell us what to expect.
Every year I read about the ‘Santa Rally’; looking at the data on the portfolios this hasn’t happened for four years. My question is could 2015 shake off its irrational fear and deliver a ‘Santa Rally’? If this is the case, then we could see returns of between 5% and 7% for the year.
And what about the benchmark?
We have always said we aim to outperform the benchmark; and we are pretty pleased that we have achieved this.
The benchmark isn’t random, and it isn’t set to be easy to beat. We take a basket of equivalent funds which track the index and compare it to the portfolios. The argument is that if this basket beats the portfolios then you could easily invest in the benchmark.
The challenge is the fixed interest space (bonds) because we don’t use any (other than emerging markets (for which we have a separate comparison)).
How do you compare the alternatives like the Standard Life Global Absolute Returns Fund?
Initially we felt Global Government Bonds was a fair comparison but negative returns dragged down the benchmark and so we started to use cash. Although this pushed up the performance the gap between the portfolios and benchmark remains uncomfortably wide. We have therefore adjusted the benchmark back to the start date of the portfolios and used a 50 / 50 split of iShares Corporate Bonds and UK Gilts as the new benchmark. We believe this to be the fairest comparison and we will continue to monitor this.
As expected this has narrowed the gap between the benchmark and portfolios, (especially for the lower risk portfolios) however we continue to outperform which is our primary aim.
Going back to October.
October’s rally has pushed returns for the year to between 2.56% and 4.40%, and for five years between 7% and 8% p.a.
History would indicate that November and December could be flat but we haven’t had a ‘Santa Rally’ for four years. There are many ifs and buts, but if the Fed raises rates, and if the markets become more rational then perhaps 2015 could buck the trends of 2011 and 2013 and deliver positive numbers. If this is the case, we could see returns of between 5% and 7% for the year.
Of course nothing is guaranteed and past performance is no guide to the future; and the value of investments can go up as well down.
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.