Investors are said to achieve far less in returns than the markets in which they invest. How is that possible you may ask? Typically it is down to investor behaviour. Investors get blamed for doing silly things when it comes to investing, however my take is that it is the financial professionals who must shoulder the responsibility for it. This is not to suggest that the advisors/planners that might assist investors have total control over what an investor does, but I do believe that if an investor is engaging with an advisor/planner that that professional has a duty of care to let that investor know how investments have worked since ‘time began’. Without this knowledge then it is only utterly natural that an investor will succumb to fear and do something irreversibly costly which will have a lasting negative impact on their future.

Knowledge:

So where does one get the knowledge needed to make informed investment decisions? There are certain resources that will tell us all we need to know, and others will tell us more than we need to know! Irrespective of whether this is regarding a pension, regular saving or lump sum/inheritance/windfall history is history, and it is this history on which we must base our decisions. There are lots of people/financial wizards who may claim to be able to tell what the future holds but this is hearsay. History, and a healthy does of optimism for the future, is all that we have on which to base decisions.

Speaking of history, it is around this time each year that Credit Suisse issue their ‘Global Investment Returns Yearbook’ and this year was no different, they issued it! This details their research on the historical returns of pretty-much everything investment-wise from 1900 to the present day, and detail their findings. Like a lot of this type of research that’s made available it is full of really hard-core technical detail, some will love it and others would light the fire with it. If it is your cup of tea then here’s a link to it.

How Have Investments Performed Over The Long Term:

Credit Suisse are quick to point out that most of the data they use starts from 1900. In 1900 nobody has sent an email, driven a car, turned on a light, seen a movie, listened to a radio, flown in a plane, taken an antibiotic nor had a transplant! Many died young, indeed if you were born in 1900 you could reasonably expect to live for 45-48 years……in the 100-odd years since then the above list has become daily occurrences we take totally for granted, and if we are at a funeral of someone in their early 70’s it’s kinda acceptable to suggest that they didn’t get their fair share of years of life…..optimism is the way!

And this progress is reflected in the long term returns that markets have delivered. This is surely not surprising as markets are merely the community of companies that provide the services and products we now consume and utilise on a daily basis…..the more stuff we consume and utilise the more profit these companies generate and the more their share prices increase.

In regards increases the ANNUAL returns from Developed Market equities from 1900 to 2018 has been 8.2%. That is an average annual growth of 8.2%. For most of us that would have been absolutely more than enough return on investment. Many suggest that Emerging Market equities offer greater potential for return (in conjunction with a little more volatility) however over the period 1900 to 2018 they have delivered an average of 7.2%, a full 1% less than Developed Market equity. Much of this disparity was apparently due to Russian revolution in the 1910’s and then the 1940’s in Japan where equities lost 98% of their value (pointing to the absolute systematic risk of investing heavily in 1 region or country only). If it were not for those 2 events the suggestion is that Emerging Equities would have delivered greater annual returns than Developed Equities.

When one looks a little closer and over a slightly shorter period, from 1950 to 2018 the Developed Market equity delivered 10.5% while the Emerging Market equity delivered 11.7%, over 1% per year more per year on the Emerging than the developed.

The above are the purest of investments, these are the indices (plural of index!), these are not some complex retail products dreamt up by companies that stand to benefit from making it all sound complex, shiny and thus very profitable for them to sell to you! These are the most basic form of investing, and the route that even the likes of Warren Buffet has instructed his trustees to put his money into for his wife if he dies before her…..they are as pure as you can get in terms of investments.

How Have Investors Performed Over The Long Term?

Dalbar Inc is an independent American Financial consultancy, around since the 70’s, which conducts analysis and comparisons on funds, businesses and investor behaviour. In recent years they have become quite well known due to the fact that they have published some really interesting research conducted on investor behaviour. This ‘Quantitative Analysis of Investor Behaviour’ (QAIB) research basically analyses the level to which investors, as a group, will make changes to their investments and portfolios based on what is happening in the markets at a particular time. It tracks the degree to which investors try to time the markets, to predict where it is going at any one time. What it allows them to do is to essentially determine how investors perform versus the investments…..I think you will already know how this will end!! Here are some stand-outs:

1. In the study of one year, 2016 only, the average investor achieved returns of 7.2% while the S&P 500 delivered 11.96%. Investors, on average achieved 5% less than the market…..all due to timing, moving funds in and out trying to ‘time’ their investments
2. Again in the study of 1 year only, 2016, and this time relating to Bonds (it happens across the board you see!) the average investor return was 1.2% while the Benchmark in the study, the Bloomberg Barclays Aggregate Bond Index hit a return of more than double that, with 2.65%!
3. Looking over the longer term, 20 years from 1996 to 2016, the average period of time that investors hold onto their investments was just over 3 years. 3 years! That is an absolute guaranteed route to deliver appalling returns for ourselves, anything less than 7 years really is asking for trouble
4. Over that same period of time, DALBAR state that the average investor investing in equities gained annual return of 5.3% while the S&P 500, in this instance, delivered over 7% annually. Indeed the same Bond Index mentioned above actually delivered nearly the same as the average investor got with annual 4.6%!

Why The Difference Between Investor Returns and Investment Returns?

This research was conducted on pure indices, where there is no fancy-stuff, and relatively low charges. Even if we assumed 1% total fund fees here (being USA it’s about right) the differential is put down to the fact that when volatility strikes, investors will move ‘temporarily’ out of equity and into Bonds or Cash funds. Incidentally I did hear of an online robo-investing platform in US which experienced large % of their customers move out of equity funds in December last due to the volatility, only to not get back in on time to experience the surge (which it happens to still be at at the moment).

It has been shown time and time again, that most of us mis-time our movements and end up costing ourselves money. It is human nature, if you see your fund fall 5%, 10%, 15% (as it did in December) to want to take some action, madness to not do SOMETHING, surely!? Alas, if history has shown us anything, and indeed this pretty significant piece of research has shown us anything, is that the very best strategy may well be to just do absolutely nothing, to let the pure investment strategy that you chose at the outset do it’s thing!

Conclusion:

I had the absolute pleasure of being a guest to hear Mohnish Pabrai, a legendary Value Investor. Guy Spier who was on the show for our 100th Episode says that Mohnish has been a hugely positive influence on him as an investor and a person. He was flying back from US to India and made a stop-off in Dublin to give a talk in Trinity a few weeks back, and he entertained us in his unique style, talking about his really quite huge investment fund (of which he is the sole employee!), and his equally significant Foundation, which he uses to identify and give away his equally significant net worth!

One of the short stories that he shared that you might enjoy was about a multinational investment firm which we would all know the name of was doing an audit on it’s accounts, and analysing which account holders had performed the best in regards annual returns. What was interesting about this was that the vast majority of the investors that had the best performance out of all of the thousands and thousands of investors were the accounts where the investor had actually forgotten about the funds, or they were dead and were left untouched for long periods of time. Need we hear any more!

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Thanks For Reading,

Paddy Delaney