As we reach the end of another tax year, it’s time once again to look back and see how our expectations of investment growth have faired against the brutal reality of the past year’s economic turmoil. In my last blog, “You’ve been framed”, I explained there is little point in basing lifetime decisions on the previous 90 days gains or losses. Shortly you will receive your next 90 day statement, it will reflect a much healthier period, but please continue to ignore short-term performance when we are all investing over lifetimes.
Whats happened over the last 12 months?
It’s been a challenge to say the least. We sold down risk assets across our portfolios twice in the year to reduce the effects of an increasingly un-certain economic outlook. Only recently have we re-committed to use that cash to purchase further investments.
Last year will generally be measured by how much was lost.
As investors we are rewarded for our resilience. We need to be able to take it on the chin once in a while. My rule of thumb is that we will only make money 3 years out of 4. We measure three of those years based on how much we made. We measure the fourth on how little we lost.
In previous blogs…
I have been realistic about our short term future for a long time. A quick re-read of this years blogs is well worth the time taken to show that a slowdown was expected.
Key to the charts below
The Orange line is our portfolio performance. The Blue line is the performance required to double our assets over a 10 year period – 6.93% compound. The two feint lines Green & Yellow are the Moderate benchmarks we use. I have used the same benchmarks across each of the 4 portfolios for comparison purposes.
After a very strong start, Our Cautious Portfolio ended the year 1.86% up after charges, having dropped as much as 4% below the start of the period. The performance reflects the allocation of around 50% to cash since July.
Our Moderate Portfolio also ended the period slightly positive, up 0.77%, after dropping as much as 4% below its starting value. However having enjoyed a brisk 7% climb and a subsequent fall the difference felt briefly more like a 11% plummet in value. We have temporarily slipped behind one of our benchmarks, but we are closer than it looks on the above chart as the benchmarks are before fees.
Our Aggressive portfolio almost mirrored our Moderate portfolio over the year. The portfolio contains many more risk assets and remained more fully invested than either of our Cautious and Moderate portfolios after July so it should have faired worse. My takeaway is that I clipped the risks Aggressive investors were prepared to take. It made 1.86% over the year after platform fees and our fees, my expectation was that it would undoubtedly have lost money.
The AIM portfolio finished the year with a loss. Investors in this portfolio understand it will be a rocky road. We did not sell down at all and allowed this Portfolio to remain fully invested and take the knocks on the chin. Predictively it suffered twice the drop that the Aggressive and Moderate portfolios experienced. Again I would have expected a deeper drop in value. Peak to trough however was not far short of -20%. Ouch.
A week is a long time in politics
A year is no time in investment, so here are the more useful 5 year views. Overall it has been a tricky period to navigate, but I’m sure decisions will not become any easier in the future.
Our Cautious portfolio is designed to preserve capital and preserve the real buying power of a clients investment capital. To achieve that it needs to beat inflation after charges. With a return of 18.35% over the period it remains comfortably ahead of an assumed inflation rate of 2.5% per annum compound. That would suggest a rise in prices over the period of 13.3% in total.
Our Moderate portfolio has once again dropped below our stated aim of doubling clients investment capital over 10 years. To be on target would require a return of 41.37% at this point. We would like to see the catch up occur over the next 12 to 18 months to put the portfolio back on target. Obviously we could introduce more risk into the portfolio, but that would not be consistent with moderate clients stated attitude to investment risk.
Our Aggressive portfolio gave returns of 48.57% over the 5 year period net of charges. It continues to present the opportunity to clients of more than doubling capital over a 10 year period. Obviously it is a harder portfolio to live with over the short term as it remains more fully invested in times of perceived stress.
Investors in our AIM portfolio briefly saw their original investment double in value with 100% growth mid way through year 4. However event after the recent falls, 80% growth over 5 years is still very acceptable for the level of investment risk taken. Our results are up there with the best AIM portfolios available.
what does the crystal ball suggest?
This year had similarities to 2011. The outlook is that there will be a mild recession in 12 to 18 months time across the globe. This slowdown has already been priced into markets and we should see mild growth from here on. Investors never make a decision on what is happening today, the invest based on what comes next. If the global slowdown is averted for now, we will see a bounce in values. My long term projection is that our portfolios will broadly behave as they have done for over a decade now and give returns close to their objectives.
what if I have any questions?
We are all ears. As always email, telephone or arrange a face to face meeting.