Our Perspective on 2018's Returns
Welcome to the first Collingbourne investment blog. The aim of these is to present evidence and truths from the slightly counter-intuitive world of investing, to highlight what actually matters and to help insulate you from the usual noise and bluster produced by the media and the investment industry.
This edition compares 2018’s investment returns with Collingbourne’s long term planning expectations (before charges) for a range of investment types (asset classes).
In creating our clients’ Financial Plans, we need to make a range of assumptions about future investment conditions. We base these assumptions on theory, research and long-term historical data (more than 100 years’ worth in some cases).
The chart below shows the returns of several asset classes in 2018 (red marker), compared to our long-term expectations of annual returns (black marker). The chart also shows the extent to which we believe these annual returns are likely to vary (the blue area).
For each asset class, we expect roughly 2 out of every 3 years to fall within the blue area. We expect roughly 1 in 6 years to have returns better than this and 1 in 6 years to be worse than this – years that are ‘out of the blue’ as it were. Crucially, we believe no one knows in advance when these more extreme years will happen.
We can see all the 2018 returns are at the lower end of our long term expectations, particularly for UK Equities (media focus) and Global Small Company and Value Equities. However, they are all within the blue range.
As such, 2018 was a poor year for investment returns, but not a particularly bad or unusual one – remember we should expect roughly one year in six to fall below the blue area. As investors, these types of years should be expected fairly frequently, ; this is the risk taken for higher expected returns (above cash).
If we look at how 2018 compares to recent history (last 30 years), we can see this further:
For the riskier property and equity returns, 2018 was a long way off the worst years of the early 1990’s and the credit crisis. The safer assets of cash and bonds were closer to their worst returns, but this is not entirely unexpected, given historically low interest rates remain.
So, what can we draw from this? Do these returns tell us anything about likely returns this year or suggest any portfolio changes? No, not at all.
What evidence does show us that the markets reward discipline. Decisions to chop and change strategies based on market conditions can destroy wealth very quickly. This is a subject we’ll return to in detail in future newsletters.
The greatest chance of having a successful investment experience is to invest for the long term, in a manner appropriate for your Financial Plan, based on your objectives and your tolerance to risk. Within this context, the short term returns of 2018 change very little.
Data sourced from Dimensional Returns Programme: Total Returns, all income reinvested, GBP terms. Returns are based on market indices, representing individual asset classes, a full list of which can be provided on request. Indices are not available for direct investment and take no account of any costs or individual tax liabilities, that must be occurred when investing, which reduce net returns. These figures are provided for information purposes only.
This document should not be considered a recommendation to purchase or sell any particular investment. Care has been taken to ensure the accuracy of content, but no responsibility is accepted for any errors or omissions. We do not predict or guarantee the future performance of any individual security, investment, portfolio or asset class.