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2021 Investment Returns & Your Priorities for 2022. Blog 191

informed decisions blog

2021 Investment Returns & Your Priorities for 2022. Blog 191

10th January 2022

Paddy Delaney


This week I share evidence & facts about investment returns, and also invite you to ask yourself an important question! Our agenda for this first piece of 2022:

  • The investments returns you should have got in 2021
  • The investments returns you will get in 2022!
  • Another way to think about ‘New Year Resolutions’

The investment returns you should have got in 2021

Before I share total returns data for last year, I’m keen to reemphasis key principles around market returns, most prominently:

  • We get the returns we deserve, for the level of volatility we take
  • Returns in the past 12 months have little bearing on our overall financial position and plan
  • There’s little value to be had from looking backwards and analysing performance over short periods of time

So why share these thoughts, I hear you ask! Well if you are not a client of Informed Decisions then you’ll quite likely be invested in something that you have no reliable way of comparing to anything else out there – so you might be wondering whether your existing approach is where it needs to be or not. I hope it helps put your mind at ease. Secondly, I’m fairly confident that the results will point to an important principal of investing, that you get the returns you deserve. This principals suggests that, provided you are being treated fairly by your provider re fees and investment allocations etc, that the returns you achieve will be correlated to the level of ‘risk’ your portfolio is ‘exposed’ to. In simplest terms, if yours is a ‘low risk’ fund you’ll get low overall returns, and if your fund is ‘high risk’, you’ll get high returns. This is also known as ‘Risk Premium‘. Note; risk in this scenario refers to volatility and not risk of capital loss – you need to be very well diversified for this to make sense for your portfolio!

Lets see how three different portfolios of varying degrees of volatility performed between Jan 1st 2021 to 31st December 2021. A ‘year’ of course is an arbitrary date range, but it’s a measure of time we all seem to use, hence I’m using it here! The portfolios below are not put here as examples of what you should do, they are simply three comparable portfolios which invest in the overall market in a diversified and passive manner.

Portfolio A is the most volatile, at 100% Passive Global Equities. For the purposes of this analysis it is simply three passive funds; 60% Developed Market, 20% Emerging Market and 20% Small Cap

Portfolio B is 80% Equity and 20% Bonds of the same three equity funds plus a Bond fund; 50% Developed Market, 15% Emerging Market, 15% Small Cap and 20% Global Bonds (Various Durations, Corporate & Govt)

Portfolio C is 50% Equity and 50% Bonds of the same four funds; 30% Developed Market, 10% Emerging Market, 10% Small Cap and 50% Global Bonds (Various Durations, Corporate & Govt)

Total Returns in 2021 from 3 different portfolios

No surprises then to see that the Total Return from the three different portfolios were proportionate to the level of volatility they held:

  • Portfolio A (100% Equity) 27.2%
  • Portfolio B (80% Equity & 20% Bonds) 23.8%
  • Portfolio C (50% Equity & 50% Bonds) 16.2%

If you were invested in portfolio A from above, you had to endure 7 periods throughout the year where your fund fell temporarily by c5% or more! Compare that to Portfolio C, where you experienced zero temporary declines of 5% or more! Despite that, or indeed because of it, Portfolio C delivered c40% less return than Portfolio A over the course of the year.

The well-diversified and low-cost portfolio that (temporarily) falls by a higher percentage, and (temporarily) falls more frequently, delivered better outcomes for the investor.

-Paddy Delaney

If we apply that same counter-intuitive logic and perspective (because that is what it is) to the next 10, 20, 30, 40 or more years of our own investment & retirement planning, we’ll have a better grasp of long term investment success than 95% of the other humans on this planet, including a lot of the financial advisors on it. It really is that simple, but not easy!

What might also come as a surprise is that you may be reading that and taking double-digit annual returns for granted – as if that is somehow the norm! It’s not, so lap it up – bask in it’s splendidness for a moment and do yourself a really huge favour by reminding yourself that it won’t always be as easy as this! Check out Blog 186 for more about the realities and long term probabilities of market ups and downs!

An aspect of such performance analysis that never ceases to surprise me is the performance of a lot of the insurance-based options out there. When compared to the equivalent portfolios above, volatility wise, the majority are simply awful. Again, it boils down to over-complexity, fees and in the case of active managed options; trying to be too clever.

The investment returns you will get in 2022!

As sure as God made little apples (I’ve no idea where that expressions comes from!), the same outcomes above will hold true for 2022. If you are invested in a low volatility portfolio you’ll experience low level of positive return, or a low level of negative returns for 2022. If you are invested in a high volatility portfolio you’ll either experience a high level of positive returns, or a high level of negative returns, relative to the low-vol portfolio. It’s as simple as that.

The achievement of either ‘high’ or ‘low’ returns shouldn’t in itself dictate what sort of a portfolio you hold of course. Other factors which we have discussed here many times should be factored into your portfolio design:

  • How much return do you need to achieve the outcome you seek?
  • How much return volatility can you mentally sleep-with, be it positive or negative for significant periods of time?
  • How much liquidity do you need within the portfolio to generate income/lump sums over time?
  • How much flexibility have you as to when you access those incomes/lump sums from the portfolio?
  • What other assets and income sources you have or can turn-on if and when needed?

These, and other considerations, ought to be factored into your portfolio. Don’t simply decide based on 2021 performance that you’re changing from a low-vol to a high-vol portfolio. That is chasing returns for the sake of chasing returns, and inevitably the investment Gods may decide to punish you for being greedy! The next thing you’ll know you’ll move back to Low-Vol and consolidate the temporary decline – seeing you go back to low-vol with a 20 or 30% haircut, a bruised ego and a tarnished view of a high volatility approach!

If on the other hand, your long term investment plan and strategy indicates that low-vol won’t serve you as well as a high-vol portfolio ought, then that is another thing entirely. In that case, the 2022 returns you do achieve will simply be a tiny part of your overall financial plan, and will matter less and be less worrisome with that long-term perspective.

Another way to think about ‘New Year Resolutions’

If you are indeed looking ahead at 2022, and want to improve, change or prepare for something meaningful there are tonnes of tools and concepts to help you do so. Any long term reader will know my fondness for some of Stephen Covey’s approaches to prioritising and planning our lives in line with what is important to us personally. It goes beyond the financial but equally it can and should be applied to financial aspects of life also.

One concept that his teachings introduced me to was the ‘Eisenhower Matrix’. I like it because it is simple yet effective, and can be used and applied by any of us, in pretty-much any scenario, and New Year Resolutions are no different!

The Eisenhower Matrix, developed apparently by the US President of the 1950’s, Dwight Eisenhower, is a useful way of clarifying your priorities, ensuring you give them time, and also holding you to account on an on-going basis, if practiced! The matrix revolves around the distinction between Urgent things and Important things. So often, we confuse and blend the two – which is really quite a flawed thing to do. Something that is important is not necessarily urgent, and something that is urgent is not necessarily important, right!?

Contributing to your pension is not Urgent for most of us but most of us will decide that it is Important. Getting regular exercise or achieving a certain fitness or weight may be Important but again not usually urgent. Renewing your car insurance is Important, and usually also urgent. Developing a new business relationship or product in your business is most likely not urgent but is important. If you are in your final years of work before retiring, ensuring you are financially and mentally prepared for retirement is not urgent (it doesn’t need to be done today or tomorrow!) but is most likely very important. We can go on and on!

Personally, I use the Matrix (focusing on the top 2 boxes usually!) to help me decide what should and what should not get time in my diary. A prime example of such an activity is a letter that I send to clients at the beginning of every year. It is intended as a reminder of investment principles, and as a preparation for the year ahead. Is my writing and then printing and packaging and posting those letters an Urgent task? No it’s certainly not – if I didn’t do it there would be nobody screaming for it!! Is it an Important task though? I believe it absolutely is. It is therefore Important but not Urgent. On the Matrix, this is a ‘Quadrant 2’ activity. Quadrant 2 contains our most impactful and proactive activities.

Without over-egging it here, I believe the reminders and preparations in that letter will be the difference between the people I work with achieving their financial goals, and not. Had I not put the time required to write and post those letters into the diary, and prioritised that time, I would have not done it. I would have filled that time with other activities that would perhaps be not important and not urgent!

And to really hammer the value of Quadrant 2 activities; if we do not do important stuff when it is not urgent, that stuff often makes its’ way into the Urgent/Important box. When it is Urgent and Important it becomes very time-bound and we have to be more reactive. It is where stress happens! It is more difficult to manage and achieve a good outcome when we are being reactive and under pressure for time.

At least once per week I try to draft a quick Matrix for myself – to determine what are the Important/Urgent activities (Quadrant 1) and what are the Important/Not Urgent activities. That is my guide and personally I find it a hugely helpful way to ensure what needs to get done gets done, often before it needs to get done! I don’t always succeed of course, but am confident I do more often than I would if I didn’t take these few minutes to consider it all.

My view, not that I’m an expert here by any means, is that we can make life easier for ourselves and others by putting and keeping more of the Important/Not-Urgent activities in our calendar. We push-away more of the Not-Urgent/Not-Important stuff and embrace more of the Important & Not Urgent stuff. If we can successfully do that even a little bit more, our 2022 goals will be more achievable and more in our own control.

I’m sharing all this in the hope that it might help you clarify and achieve your own prioritises – even in a little way – and that your reading of this piece was itself a Quadrant 2 activity – Important but not Urgent!



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