In my final blog looking at
pension charges and investments I want to consider past performance. I have
recently received a report from Dr Ros Altmann called “Pensions: Time for
Change” – I am slowly making way through this. The report is excellent and
covers a lot of information but one point I want to focus on is having a plan
and being realistic in our expectations.
In my last blog I mentioned that
in the past I based my investment decisions on past performance. During the
late eighties and nineties we became used to double digit returns. We didn’t need
to be investment experts to achieve these returns. Towards the end of the nineties
some funds achieved triple digit returns. Without understanding those funds,
you have to ask “why have double digit returns?”
Of course we all know what
happened. It was a bubble and bubbles burst…….
Over the last couple of years we
have seen double digit returns from our more adventurous portfolios. If I
listen to various fund managers they state we are in a bull market and shares
will go one way……and that is up.
I listen to lots of fund managers
speak and their arguments are compelling but going back to the report we have
to be realistic about our expectations. If I assume that I will achieve 14%
return p.a. on my investments for the next 20 years then you have to ask is
this realistic. If I am honest I would say not.
Some fund managers are now saying
many equities are “fair value” this means they don’t have much growth left in
them. Of course it’s not as simple as that as some stocks will perform well,
some will become unloved and sectors and geographic regions will do the same.
Some could argue that there is still value in small and mid-cap stocks. The
point of all of this when looking at investments, is that past performance is a
guide but realistically it is just that; we need to be thinking about what can
be delivered in the future.
Diversification can help because
not every region, sector etc will perform well at the same time. So when one
slows, the other can take up the slack.
Going back to realistic plans,
clearly just because we have had a couple of good years we cannot expect that
to continue (well we can expect it to continue but we might be disappointed).
If we look at the Barclays report they expect equity returns to be around 5% p.a.
for the next 25 years. So if we can achieve 5 – 7% p.a. (after charges) then
that would be higher than cash (which they expect to be flat) and bonds (which
they expect to be negative).
The question is do I believe that
is achievable, I am a great believer in good active managers. In this environment
it is these managers that will deliver because they identify the areas which
can drive returns. I also believe that diversification can help. Therefore when
I look at my financial plan I use a rate of 5%. If I achieve more than that, I
will have more in retirement. But being conservative and realistic is
important. If I based it on past performance (especially one year) I would
almost certainly miss my target and be disappointed.
In summary past performance is a
guide, but understanding what might happen in the future and being realistic in
our expectations is the only we will achieve our financial plan.
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