Aiming for Average?
As we have mentioned on many occasions our view is that consistency is the key to successful investing; we try and break things down to a simple approach.
- Long run returns from equities are circa 7% per annum
- These returns come with volatility and dependent on where you start from
- The aim of our portfolios are to reduce this volatility and provide consistency
- Avoiding large losses improves returns and maintains investor/adviser sanity
- The strategy requires patience and the willingness to accept “boring” returns
To demonstrate we have used a sample of actual client portfolios back to 2009 that covers all risk profiles; as you can see in image 1 we are pretty consistent with some weaker years (2011 & 2015) offset by stronger years (2016 in particular when a lot of strategies started to come to fruition).
The overall results over the period is the average return was 5.12%, the median return 5.19% and the Internal Rate of Return (IRR*) 5.79%; now this may have underperformed the FTSE-100 in the last few years as it recovered from the lows of 2008 but what about the longer term?
The graph in image two shows the FTSE-100 Total Return including dividends compared to a fixed rate of return of 5%, 5.25% and 5.75% (the software we use has increments of 0.25% so we can use an exact figure).
Aiming for consistent produces a pretty satisfactory outcome in our view and without the painful and often prolonged losses that investing in the FTSE-100 alone can bring.
* Internal Rate of Return (IRR) represents the cumulative realised and unrealised capital gains and losses of your investments, plus income from the investments, over a period of time. The IRR calculator takes into consideration the timing of your personal deposits and withdrawals. The IRR is an annual rate of return where the shorter the period the more dramatic is the result of annualising the return. For this reason, it is, generally, sensible not to place too much emphasis on the IRR for short periods, particularly those less than a year.
