Long term returns

Long term returns

Image by Steve Buissinne from Pixabay

After the year we experienced in 2020 and the current volatility we are seeing in various asset markets it seems appropriate to remind ourselves that when we invest in equities and bonds we should be doing so for the long-term.  2020 was an incredible year for a lot of negative reasons and, although we’d all like to forget it, unfortunately it’ll live long in the memory.  From an equity market perspective the year provided us with a reminder of just how volatile markets can be but it also showed us that for those of us who stick to our plan and remain invested it could still provide positive returns.  Two things that we should focus on now and in the future.

If we didn’t check our investment portfolios throughout the days and weeks of 2020 and just looked at the value at the beginning and end of the year, we might have been surprised to learn of the volatility that happened during the year.  A good example of this is to look at the MSCI World Index, which gained circa 13%, in sterling terms, in 2020.  This was despite a considerable downturn in March caused by the pandemic.

Obviously the majority of us wouldn’t have been 100% invested in a portfolio which mirrored this index.  The MSCI World Index is a representation of the global developed equity markets, capturing large and mid cap companies across 23 developed market countries.

However, even in a more balanced and more diversified portfolio containing emerging markets, global property companies and defensive assets such as short dated bonds, most portfolios will have finished the year either slightly into positive territory or with no significant losses.  Certain asset classes didn’t perform as strongly as others such as value stocks, global property or smaller companies but, overall, most investors shouldn’t have been disappointed with 2020 given the returns they experienced in the first quarter.  This might not be the case in 2022 but it is worth remembering that short term volatility is just the price we pay for hopefully achieving a positive long term real return.  

This is one of the main reasons why we suggest not looking at your investment portfolio too often.  In fact, even though it’s encouraging to look back at 2020 and see that the year ended with better returns than you might have expected back in March and April, we should really be looking at a much longer period. 

If we look at the MSCI World Index again as a proxy for equity returns, we can see that the ability to stay the course and remain invested results in the best long-term outcome.  Holding our nerve and not making emotional decisions when markets are falling, as they are now, is one of the keys to a successful investment experience.  We only have to look at the index returns over longer periods to see the returns equity markets can provide.  The annualised return of the MSCI World Index over the 10 years to the end of May 2022 is c.14%, again in sterling terms.  If we go back even further to near to when the index started, the annualised return to the end of May 2022 from 31st December 1987 is 9.4%.  Obviously there has been volatility during these periods which is why most people are not invested in a portfolio which entirely matches that index.

What this clearly highlights is that when looking at long-term investing, compounding and time are your friends.  We should all be concentrating on the long-term when taking the risk of investing in equities.  This shouldn’t be difficult if you have a financial plan as, unless you don’t have long to live, it’s highly likely that most people’s financial plan has at least 30 or more years to run.  Even if you don’t expect to last that long yourself, your portfolio may outlive you and continue to deliver returns for the next generation.

It also doesn’t mean that you should necessarily measure your investment portfolio against the long term return of MSCI World Index.  For one thing, it doesn’t take into account any costs which is not the reality for most investors and only includes developed equities. 

We’ve only used this index as an indication of the return possible from developed market equities.  As We’ve said before, it’s not the relative return of our portfolios against particular benchmarks that is important, but rather the return we need after inflation and costs to achieve our goals.  Once we’ve identified what we’re trying to achieve and have a plan in place to get there, any investment returns that we achieve should be based on what we need and be enough to keep us on track to live the life we want to lead.  This is the true measure of a successful investment experience.

So when market returns look particularly bleak and the news seems to be constantly depressing, it’s worth remembering that in a long-term context these tend to be mere ‘blips’ both in terms of returns and life itself.  I know it’s hard, particularly now and in the recent past, to see any positives but investment returns should look better over the long term if global economies continue to grow.

Technology should continue to improve our lives and not only help us get through the current challenges the world faces but also mean that investment markets continue to provide the long-term returns we need to fulfill our goals… just don’t look at your portfolio too often.

This blog is intended for information purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.  Your capital is at risk when investing.  Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance.