“The difference between success and failure is not which stock you buy or which piece of real estate you buy, it’s asset allocation” (Tony Robbins)So despite a media trying to convince us all otherwise, May was a good month for developed markets , steady increases across the board and with low volatility also, data being:.
MSCI World +4.7% -8.9%
S&P 500 +4.5% -5.8%
FTSE +3.0% -19.4%
Nikkei +9.4% -7.5%
SSE -0.3% -6.5%
MSCI EM +0.2% -12.8%
And on the currencies, mixed monthly results for the USD…
GBP +1.6% +6.8%
EUR -1.5% +0.8%
JPY +0.6% -1.1%
AUD -2.9% +5.5%
CNY +1.1% +2.4%
When the time comes that you rely on your investments rather than work to sustain your lifestyle, relying an one asset class / revenue stream can be a high risk strategy. Getting this mix right before retirement is key to ensuring you spend these golden years doing as you please without financial constraints or worries.
Diversification can be a tricky balance. Whilst many of us still like the mantra that you shouldn’t keep “all your eggs in one basket”, over diversification reduces growth and as Warren Buffett says is only “required when investors do not know what they are doing”.
The world of investing is inherently a diverse and complex one. There are so many aspects to consider: liquidity, volatility, time frame , risk, tax, passive, active etc etc , the list goes on and on. These aspects are at asset class level, i.e property, stock market and then again once the asset choice is made: stocks, funds, bonds, apartments, houses……there are literally billions of ways to make money and billions of ways to lose it.
Each and every person’s needs and wants are different but in the majority of cases when I have meetings with clients about financial planning most of the time we look at between 3 and 10 year time horizons. The table below shows the returns made by different investing methods over the last decade. The returns are based on a £100,000 investment….
No of years 3 5 10
Oil72,91758,33346,053I have used a yield of 5 % per annum on the Coca Cola and UK property as these offer both income and capital growth. Of course this is only a quick and dirty comparison and there are many other aspects to consider such as tax , liquidity etc although it still makes for some interesting reading.
Those of you who read my updates know I am not a “gold bug”, as I don’t understand the asset class. The arbitrary idea about putting 10% into Gold that some managers advocate is never one I have followed. However it has actually outperformed the S&P over three years and almost matched it over five years. That said go back to the years between 2010 and 2015, your £100k made less than £4k profit whilst your S&P tracker made you a handsome £130,000 more. Use good managers like Lindsell Train after three and five years you have £147k and £206k, significantly outperforming all of the above
So the evidence is there that with a longer term view by not having a well proportioned slice of your wealth invested in the stock market you are missing out on a lot of growth.
Two Reasons I hear most often for not wanting to buy into the stock market are because I “only buy property / invest in my own business” and its “too risky”
There is irony here as any investment strategy where you ONLY invest in one area is an inherently risky one. Investments like property should most definitely form some of your overall portfolio and no doubt those who are successful in this sector will say they have made significantly better returns than those average property price increases I mention above.
Risk is specific to an individual but I do think that risk associated with the stock market is overplayed by the media forever relating the words “stock market” to “crash”. Crashes have happened, we saw nearly a 30% fall in the first quarter of this year but two thirds of those losses have already been recovered and I would dare to suggest by the end of this year the other third will be back. What about the 279% in 10 years as illustrated above, even after these “crashes” and other media nonsense about the economic impact the recent pandemic will have.
My job is to manage that risk appropriately by getting the mix right for you. Property investors and business owners often cite lack of understanding as a reason why they put their money where they know. No one follows that mandate more than myself, understanding what you invest in is what I preach, buying good companies who have good products like Microsoft, Nestle, Unilever, Colgate through good managers is how you sustain long term capital growth
So as you read this on your PC (Microsoft), whilst drinking your coffee (Nestle) before taking a shower and washing with Dove Shampoo (Unilever) and brushing your teeth (Colgate), just maybe you do understand more about the stock market than you thought……