When is a loss not a loss?

Now that Christmas has passed and a New Year has just begun, it is probably safe to admit most of us don’t actually believe in Santa Claus. However, we do tend to believe the news, and even some of what we read on the internet. As most of you know I try to avoid the news like the plague. I went cold turkey last year (sorry couldn’t resist one last Xmas pun!) and shielded myself from the media as far as possible. Unfortunately, I was in the car the other day and couldn’t turn the radio off in time before I heard a news headline that the FTSE 100 index of leading company shares (a measure of the success of the UK economy apparently) had, for the first time since 2011, finished the year lower than it started. Allegedly, the UK stock market had a bad year and investors lost 2.7% over the 12 month period which apparently implies that tough times might still lie ahead for investors. The media just loves bad news but the facts tell a slightly different story.

The FTSE100 is indeed an index of the 100 LARGEST companies REGISTERED on the London Stock Exchange (something quite different from the 100 leading UK companies). The level of the FTSE100 quoted in the media doesn’t include dividends. As you may already know, the main part of the return from owning shares comes from the dividends earned (that is actually the investment bit). The growth in share price is much more speculative. When dividends are added, the true return from the FTSE 100 index was actually 0.75% last year. OK, I admit 2014 wasn’t exactly a bumper year for investors but it wasn’t “a loss of almost 3%” as the newsreader proclaimed. A headline of “shares did nothing exciting last year” doesn’t really grab listeners’ attention.

Let’s take this a little further though. I have prepared a quick analysis of the returns* from our investment portfolios during 2014, and also over the last 10 years. This gives an indication as to whether the low cost diversified strategy which we advocate is doing its job effectively.

Over the 12 months to 31st December 2014, a middle of the road 60% growth assets portfolio (sometimes referred to as a balanced portfolio) returned 6.7%. A globally diversified 100% equities portfolio (a much closer comparison to the FTSE 100) returned 7.2%. The table below shows the returns over 1, 3, 5 and 10 years for each of the portfolio risk levels. The number in each portfolio name represents the percentage of growth assets (i.e. shares) in the portfolio.


Table 1

 1 yr3 yr5 yr10yr
Forty Two 006.1%9.8%24.3%54.8%
Forty Two 206.3%16.8%30.4%66.3%
Forty Two 306.4%20.4%33.7%73.1%
Forty Two 406.5%24.1%36.8%77.4%
Forty Two 506.6%28%40.1%84.2%
Forty Two 606.7%32.1%43.5%88.6%
Forty Two 706.8%36.0%46.5%94.1%
Forty Two 807.0%40.2%49.8%99.2%
Forty Two 1007.247.8%55.4%106.9%
FTSE 100 Index 0.7%31.5%44.8%96.1%

Source: FE Analytics, total return (dividends reinvested) to 31st December 2014, bid to bid, GBP


The above table shouldn’t contain any big surprises; higher risk portfolios have performed better over the long run because risk and return are related. However, the table below shows that the price of this extra return was a rollercoaster ride in the short term; a portfolio with no company shares would have returned 5.7% in 2008 while a portfolio consisting of only equities would have fallen in value by nearly 30%. This is a purely structural issue not indication of good or bad performance from either portfolio.

Table 2

Forty Two 006.1%-2.7%3.8%7.5%5.2%4.3%5.7%5.5%2.6%4.3%
Forty Two 206.2%3.7%6.0%3.4%8.0%9.6%-2.1%2.9%6.6%8.2%
Forty Two 306.4%5.6%7.1%1.4%9.5%12.4%-5.8%2.9%7.9%10.3%
Forty Two 406.5%7.7%8.3%-6.2%10.9%14.6%-9.6%1.5%9.8%12.2%
Forty Two 506.6%9.7%9.5%-2.6%12.4%17.4%-13.3%1.5%11.1%14.5%
Forty Two 606.7%12%10.6%-4.6%13.8%19.8%-16.9%0.3%13.1%16.5%
Forty Two 706.8%13.8%11.9%-6.6%15.3%22.4%-20.4%0.2%14.3%18.7%
Forty Two 807.0%15.8%13.2%-8.6%16.8%24.9%-23.8%0.1%15.6%20.9%
Forty Two 1007.2%19.4%15.5%-11.9%19.4%29.1%-29.6%-0.1%17.6%24.7%


Although most people still try to outsmart the market and select only the “best” investment funds while avoiding the “losers”, investment returns actually come from building a properly diversified portfolio with a risk profile you are comfortable with; one that you will be able to stick with through the bad times without losing sleep. Some years will be better than others but a good process should see you harvest healthy returns over time without the need to worry about the level of the FTSE100 index on an arbitrary date. It might seem a bit boring but clearly it gets results!

One of the common questions I receive from people who don’t fully understand our investment approach is; surely if you don’t even try and find the “winners” you are guaranteed to under-perform other investors over time? Clearly you will never shoot the lights out with a stunning investment decision. You will also never suffer the devastating losses of backing a major loser. Most peoples’ investment strategy involves picking future winning funds themselves, or finding a guru who can do it for them, then putting lots of eggs in very few baskets. All the academic research suggests that our approach, which relies on nothing more than diversification, discipline and consistency, should provide above average returns in the long run and actually beat most traditional investors over time. While it is a very simple strategy, it certainly isn’t easy.

As we have over 10 years of data for the real portfolios* it is possible to put this to the test and see if reality matches theory. For the purposes of comparison I have included the sector average for “balanced” managed funds Unit Trust Mixed Investment 40% – 85% shares and the ARC Private Client Balanced Index as benchmarks to show whether the strategy is performing in line with comparable investments. You can see from the table that the portfolio outperformed both benchmarks over all periods.

Table 3

 1 yr3yr5yr10yr
Forty Two 606.7%32.1%43.5%88.6%
ARC Sterling Balanced Asset PCI5.3%23.9%32.1%69.3%
UT Mixed Investment 40% - 85% Shares5.0%29.9%38.7%82.7%

We believe that everyone should be entitled to a successful investment experience built on robust and repeatable processes, and measured against a clearly defined personal financial plan. Unfortunately, very few people are currently receiving this standard of Financial Planning.

Like most people at this time of year we have made some New Year resolutions for 2015. After a few years of consolidation and ensuring our business processes are robust and efficient, we have decided to make 2015 the year we actively target growth and take on new clients. We want to spread the value of true Financial Planning and evidence based investing across the West of Scotland. We know that the absolute best way to grow any small business is through personal introductions from satisfied existing clients. We would love to hear from anyone you know who would benefit from a chat and a second opinion about their financial planning and investment strategies. We also know from talking to you that our clients regularly “sing our praises” but we don’t receive lots of phone calls from their friends and colleagues. If any of your friends are interested in speaking too us but are likely to put it on the “to do list” that never gets done (along with all their other New Year resolutions), we would be happy to contact them if they would like and make life easy for them.

Please spread the word in 2015 and help us to help more people capture the investment returns they deserve and achieve their most important financial goals.


* All Forty Two portfolio returns used in the analysis include the impact of fund manager fees but not client specific costs such as platform fees, advice fees or the timing of investment activity such as periodic rebalancing as these may vary depending on factors such as portfolio size, review date, investment timing etc.These client specific fees would be the same regardless of underlying investment so a excluding them from the analysis creates a simple level playing field for performance comparison.

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