In my final blog looking at pension charges and investments I want to consider past performance. I have recently received a report from Dr Ros Altmann called “Pensions: Time for Change” – I am slowly making way through this. The report is excellent and covers a lot of information but one point I want to focus on is having a plan and being realistic in our expectations.

In my last blog I mentioned that in the past I based my investment decisions on past performance. During the late eighties and nineties we became used to double digit returns. We didn’t need to be investment experts to achieve these returns. Towards the end of the nineties some funds achieved triple digit returns. Without understanding those funds, you have to ask “why have double digit returns?”

Of course we all know what happened. It was a bubble and bubbles burst…….

Over the last couple of years we have seen double digit returns from our more adventurous portfolios. If I listen to various fund managers they state we are in a bull market and shares will go one way……and that is up.

I listen to lots of fund managers speak and their arguments are compelling but going back to the report we have to be realistic about our expectations. If I assume that I will achieve 14% return p.a. on my investments for the next 20 years then you have to ask is this realistic. If I am honest I would say not.

Some fund managers are now saying many equities are “fair value” this means they don’t have much growth left in them. Of course it’s not as simple as that as some stocks will perform well, some will become unloved and sectors and geographic regions will do the same. Some could argue that there is still value in small and mid-cap stocks. The point of all of this when looking at investments, is that past performance is a guide but realistically it is just that; we need to be thinking about what can be delivered in the future.

Diversification can help because not every region, sector etc will perform well at the same time. So when one slows, the other can take up the slack.

Going back to realistic plans, clearly just because we have had a couple of good years we cannot expect that to continue (well we can expect it to continue but we might be disappointed). If we look at the Barclays report they expect equity returns to be around 5% p.a. for the next 25 years. So if we can achieve 5 – 7% p.a. (after charges) then that would be higher than cash (which they expect to be flat) and bonds (which they expect to be negative).

The question is do I believe that is achievable, I am a great believer in good active managers. In this environment it is these managers that will deliver because they identify the areas which can drive returns. I also believe that diversification can help. Therefore when I look at my financial plan I use a rate of 5%. If I achieve more than that, I will have more in retirement. But being conservative and realistic is important. If I based it on past performance (especially one year) I would almost certainly miss my target and be disappointed.

In summary past performance is a guide, but understanding what might happen in the future and being realistic in our expectations is the only we will achieve our financial plan.


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.