Investment Marketeers
by Doug Brodie
In this blog:
/1. When is a 3% return better for an investor than a 6% return?
/2. Averages – simple, huh?
/3. Like Helvellyn, investing seems quicker coming down than going up.
/4. When is 3% more than 6%?
Q. When is a 3% return better for an investor than a 6% return?
A. When it’s year after year.
You’ll never see an investment chart showing you anything other than ‘bottom left’ to ‘top right’. This is the FTSE All Share from January 2000:
It’s realistically transparent in that you can see the 2008 crash, and 2020 following that, however it does track healthily upwards.
That’s not what you actually get though, this is the same index but in a bar chart:
Just glancing at this and you might think that it's not very inspiring, and you’d have lost capital in around half the years. You’d be right, the All Share gave negative returns in 10 of the last 22 years.
Now imagine you’re an Investors Chronicle reader using Vanguard’s FTSE tracker for your pension (‘because cost is everything, isn’t it? …and … ‘Managers can’t beat the index, can they?’)
And without any maths at all you can see that selling 4% of your holding each year to live on is just manna for the sleep monsters, keeping you awake at the odd hour that 4 am.
This is why we don’t do that.
Back to maths and marketeers.
/2. Averages – simple, huh?
Investor starts with £100, invests into a fund.
Year 1 the fund falls -20%
Year 2 the fund rises +22%
Over the two years, what is the average return?
-20% +22% = 2% ÷ 2 years = 1%
If the return has averaged 1% over the two years, the investor expects to see £100 x 1%^2, or £102.
The arithmetic is actually £100 x -20%, and then that sum x +22%, so the answer is (100 – 20%) = 80, x 122% = £97.60.
Where did the missing £2.40 go?
Be very wary about advertising and the output of the marketing departments of investment managers, as you can see, it is very easy to mislead investors about past returns.
/3. Like Helvellyn, investing seems quicker coming down than going up.
A very simple rule that is very important – investment returns are not symmetrical; if you have an investment that falls 20%, it has to then grow by 25% just to get back to where you started.
Start with £100, fall by 20% down to £80.
To get back from £80 to £100 the investment needs to grow by £20, which is 25% of £80.
It’s not a trick, it’s just how maths works. It’s for this reason Charlie Ellis wrote his book on investing called ‘Winning the Loser’s Game’ – the message is that most people would make more money by focusing on not having their investment fall, rather than focusing on the upside.
/4. When is 3% more than 6%?
Take two funds, one whizzy, one plodding
Whizzy average over five years is 6% pa
+30%, -25%, +35%, -21%, 11%
Plodding average over five years is 3% pa
+3%, +3%, +3%, +3%, 3%
A) Which one would you choose?
B) Which one made more profit?
Simples, huh?
Doug