If you pick middle of the road or what might be conventionally referred to as ‘Medium Risk’ portfolios or funds for your investment, pension or regular savings accounts, you may face all the potential down-sides and not as much of the upsides as you deserve!

Sticking to the recent tradition of creating more utterly useless acronyms, I am pleased to now bring you the 3 Ms, or MMM if you prefer; Mediocre Middle Malaise. It’s a topic that is dear to my heart, in several respects of life but particularly so in both the work we choose, and how we invest for our futures. Please bear with me and I will try to explain what I mean, and why it might be worth considering the following for your own self.

• Why the middle-ground is often unrewarding and unfulfilling in both our career and our investing
• Why we may be better-off staying in one extreme or the other, as opposed to the more popular middle-ground in career and investing

Intro to the concept:

A philosopher or career counsellor I certainly am not, but the relationship between investing (in which I do I have a reasonable level of expertise) and our choice of work is very very similar, and worth exploring for ourselves, I believe. The relationship between the two areas struck me as I was listening to ‘30 Lessons For Living‘ by Karl Pillemer Phd, professor in Cornell University.

This book is a really interesting one – Karl Pillemer interviews around a thousand people who were in the latter stages of life, and basically gleaned as much info from them about what one should or shouldn’t aim to do in life – seeing as they had living a lot of it between them, the results are worth listening to in my view!

One of the areas that caught my attention most was not the lessons around money but the lessons around our choice of work. Many of the experts warned against sticking to a career of middle management! This is not my view, but the view of the people Karl interviewed, so don’t be annoyed with me if you are a long term middle-management exponent! I’ve asked Karl to join us on the podcast to share his findings with you, so fingers crossed we get to hear if it from the horses mouth so to speak!

They claimed that a person in middle management is the person that has to deal with the most challenges, most difficulties from both upwards and downwards, but one who quite often doesn’t get the perks or rewards of either those above or below them in the organisational hierarchy! The experts suggest that middle-management have to take all the down-sides and worries, but often don’t benefit from anything like the potential upsides that they deserve! Mediocre Middle Malaise is what I would call it.

The same Mediocre Middle Malaise can be seen in investing.

Mediocre Middle Malaise in Investing:

If you pick middle of the road or what might be conventionally referred to as ‘Medium Risk’ portfolios or funds for your investing or pension or regular savings accounts, you may face something similar to the middle-managers of the world, all the down-sides and not as much of the upsides as you deserve!

For Context: ‘High Risk’ V ‘Low Risk’:

I dislike the term ‘risk’ when we talk about volatility – but it hopefully paints the picture. High Risk refers to high volatility routes (Equity funds for example) while Low Risk refers to low volatility routes (Bonds for example). Worth noting that all of these have the potential to result in a permanent loss of your invested capital, so there is a potential for loss, which I guess is the key risk people think of when they invest, rightly or wrongly.

There is nothing middle about the two options I analyse first here, one is a Vanguard Global Equity Fund, which aims to track the MSCI Index. Super well diversified but conventionally would be refereed to as ‘High Risk’. The other is a Vanguard Global Bond Index, again really well diversified, and would be referred to as ‘Low Risk’ when it comes to investing your money in an investment, pension or savings account. From FE Analytics you can see the total returns of each since inception date of the youngest fund in June 2009:

• Equity Fund 392%
• Bond Fund 62%

These funds are the Equity and Bond fund benchmarks that many consider to be the only ones worth talking about. The middle of the road route you will see in the chart was an illustratory portfolio I made up, holding an equal blend of the two Vanguard funds, 50% Equity and 50% Bond. It’s total return over the period June 2009 to end August 2021:

• 50/50 Fund 227%

‘Not too shabby for a middle of the road route’ or ‘You are talking through your hat Delaney, there’s nothing wrong with a middle of the road investment’. In this instance you are totally correct, but that is because the above 50/50 portfolio is what I would call a ‘True Middle Of The Road’ option. You can decide for yourself below whether other more popular middle of the road options are up to standard…

‘The Real Mediocre Middle Malaise in Irish Investing’:

Irish investing has been dominated by insurance companies, for as long as I can recall. This has meant that people that would not otherwise have been able to access investment advice have been able to do so. They can invest via any bank or broker in the country.

If they are members of an Occupational Pension scheme they can access the same funds as everyone else in the country. Accessing even sub-optimal investment solutions has and will likely remain better than not investing at all for our long term futures. Despite the fact that an investment or pension you set up with an insurance company is actually legally owned by the insurance company, not you, their popularity continues to grow. This enables more and more people to access investment solutions, which is a positive on the whole.

However, the vast majority of retail investors invest in middle of the road funds offered by the Zurichs, Irish Lifes, Standard Lifes, Aviva’s and Mercer’s of this wonderful little country. How do middle of the road funds, which might be described to you by your friendly advisor as one of the following:

• ‘A balanced investment with no too much risk so you can sleep at night, you know’
• ‘An option that gives you plenty of scope for growth but isn’t too risky either’
• ‘A nice middle of the road investment that I’d put me’ mother into’

So running an analysis of a middle of the road fund from the aforementioned insurance companies, and comparing them to the three benchmark funds from earlier, what will we learn? We’ll see how well the middle of the road funds (as designed by these insurance companies) actually performed against the benchmark.

In below graph we can see that the data only goes back to Feb 2014, as that was the inception date of the youngest of the funds in this analysis. Not all funds selected here are equal, some of them have more or less equity than the others they are being compared with, but they are similar in that they are hugely popular for retail investors in Ireland, and are recommended by hundreds of advisors as the ‘perfect middle of the road option’ for the majority of investors that seek advice on this stuff. Here’s how they ranked over the period Feb 2014 to end August 2021, 7.5 years.

Top 3:

• No surprise that the all-out Vanguard Equity Fund Benchmark from earlier was top of the pops at 158%
• Zurich Balanced Fund (which actually contains c75% Equity) 113%
• Vanguard 50/50 100%

Next 3:

• Mercer Aspire Cautious 64%
• Irish Life MAPS 4 63%
• Standard Life MyFolio Market 3 60%

Bottom 2:

• Aviva Multi Asset Cautious (3) 26%
• Vanguard Bond Index Benchmark 19%

Again, this is not designed as a straight-line shoot-out as to which fund is the best etc, as they are all very different in their composition, This is more about which options most people are advised into, and how they have differed so very much!

The Real Mediocre Middle Malaise in Irish Investing TRMMMII 🙂 is that so many investors have been investing in funds that are very middle of the road in terms of their investment approach and therefore the returns that they will achieve even in the greatest Bull Market that we have witnessed in many of our lifetimes.

They have of course benefited, say to the tune of 60% in the past 7 years, and twas far better than sitting in deposit, however the real challenge is that they have taken all the risks and all that goes with that, but have achieved approximately half of the rewards of those that were invested in the Equity Benchmark, and 30 to 40% less than the True Middle Of The Road’ benchmark made up of 50% Equity and 50% Bonds we showed earlier.

What About In Times Of Market Decline?

The most recent significant period of decline (Bear Market) was obviously March 2020 when the C-word initially hit. How did the various options fare in that temporary decline where markets declined c30% temporarily? From Jan 1st 2020 to 20th March 2020:

• Aviva Multi Asset Cautious -11% (this was meant to be one of the less volatile!?)
• Mercer Cautious -16%
• IL MAPS 4 -18%
• Zurich Balanced -19%
• 50/50 Benchmark -21%
• Standard Life MyFolio Mkt 3 -21%
• The Equity Benchmark declined heaviest, obviously because it tracks the market: -29%

The main take away here is that the insurance company ‘middle of the road’ products did not shelter you during those periods of decline! Where the market declined by 28%, your ‘much safer fund’ fell by 20% or so.

A decline of 20% is as scary as a decline of 28% if you ask me – so if you are easily scared, you’ll have felt that your middle of the road route was an awful place to be at that time!

P.Delaney

And The Subsequent Recovery??

Well again, no surprises here:

• Vanguard Equity Index 82%
• Zurich Balanced 57%
• 50/50 Benchmark 54%
• Standard Life Market 3 40%
• IL MAPS 4 34%
• Mercer Cautious Growth 28%
• Aviva Cautious (3) 21%
• Vanguard Bond 3.8%

Again, the dangerous middle of the road stuff has been sub-optimal.

Summary Of The Dangerous Middle:

In essence, by investing in an insurance based over-engineered middle of the road solution you are signing up to pretty much all of the potential down-sides but you do not get access to all of the potential upsides that you deserve for investing in the first place! The dangerous middle!

By investing in the benchmarks, you are taking it on, you are investing ‘properly’ and know full-well what you are doing, and why you are doing it. Unfortunately for many investors, insurance companies build their products to appeal to your emotions of ‘a safe journey’ or ‘a balanced approach’ to your investing, which as you will see from above, simply has not delivered the results that people like you and I deserve. We deserve to be educated and made aware of the realities, the opportunities and the caveats, not to be sold complex products that might be better than nothing, but which don’t really get us where we want to get to.

A Shift In The Volatility Appetite Of Many Irish Investors?

All of the above performances, including those of the benchmark has been set against a backdrop of unprecedented upward growth in global equity. It is apparent that in such times it is easy to forget that throughout our lifetimes, on average we have seen average temporary declines of 30 to 40% in equity markets, that last an average of about 2 years. The last such temporary decline of 2020 was simply too short to cause any of us to rethink our equity approaches. The next decline will, most probably, be far more durable, and might make some of us unnervy.

My point is that while on the one hand I am saying that many investors aren’t invested properly (in equity!) but on the other hand I’m saying that there are also people invested properly (in equity) or indeed in middle of the road funds, that simply aren’t mentally prepared for the next sustained Bear Market.

In Blog 108 I wrote a short piece about Recency Bias, and how it can blind us to the realities of our investment choices. I also recall that in the aftermath of the Global Financial Crisis of 2008, I was almost begging people to save themselves, and remain invested in equity – or if they had money on deposit, that they should get invested, that it was as good a time as any to start. 90% of it was on deaf ears because their recency bias told them that Equity will mean your pot will decline in value by 40-50%.

Fast forward to 2021 and those same people are probably driven by their recency bias, which now tells them that if their investments aren’t delivering 10%+ per year, they should fire their advisor! I believe that many people are therefore invested in very adventurous portfolios, which their emotions and fears will make them jump out of when the next determined temporary decline hits us.

When that does, I and those that I work with will remain firmly invested for the long run in our equity-driven portfolios because we fear not the temporary declines. It is the investors that are invested in the over-engineered and dangerous middle-of-the-road that I fear for. They are led to expect all the returns with non of the down-side, but the reality is that they are pretty-much as exposed as anyone to the down-sides, and of course stand not to benefit as well from the upsides. Much like the middle-managers spoken about in the 30-lessons for living book, these investors may be in a false sense of comfort and security at the moment, things have been great. Ignorance is bliss, until the tide swiftly changes. Whereas us equity investors are always very aware of what can and will happen, we live with that knowledge. I guess that’s the price we pay for the long term outcomes we achieve.

Thanks for reading.

Paddy.