The past twelve months have been instructive in teaching investors about the volatility that should be expected when investing in equities (company shares). In early 2016, some investment markets had dropped by over 10% in a matter of days and the harbingers of doom were predicting a stock market meltdown. As we look back on actual stock market performance of 2016, we see that the FTSE World (Total Return) returned +11.9% in Euro terms and the S&P 500 returned 12.9% for the full calendar year. This would imply that those who sold their holdings as a result of the early falls, may well have ended up in a position where they crystallised a 10% loss and missed out on a 12.9% gain, a swing of 22.9%.

2016 –An Instructive Year for Investors

The past twelve months have been instructive in teaching investors about the volatility that should be expected when investing in equities (company shares). In early 2016, some investment markets had dropped by over 10% in a matter of days and the harbingers of doom were predicting a stock market meltdown.  As we look back on actual stock market performance of 2016, we see that the FTSE World (Total Return) returned +11.9% in Euro terms and the S&P 500 returned 12.9% for the full calendar year. This would imply that those who sold their holdings as a result of the early falls, may well have ended up in a position where they crystallised a 10% loss and missed out on a 12.9% gain, a swing of 22.9%.

I anticipate that 2017 will see this volatility continue, as the economic cycle moves to a more reflationary phase. Politics and policy are likely to dominate headlines again in 2017 but rather than try to predict what is going to exactly happen, I thought it might be more beneficial to remind you about three fundamentals of investing.

Fundamental 1; - The Power of Compounding

‘Money makes money’ as the phase goes. When a big number grows by a certain percentage it grows by much more in absolute terms than a small number which grows at the same percentage. In order to take advantage of this fact you should (a) invest as much as you can afford as early as you can so as to benefit from as many years growth as possible, (b) invest regularly to be constantly increasing the size of the pot that will benefit from future years growth, and (c) if you don’t need the income from the investments yet, re-invest the income to grow the pot further that will benefit from future years compound growth.

The first chart below illustrates the power of compounding. As one can see, a 25 year old investing €5,000 per annum, which achieves 5% growth each year, will have accumulated €639,199 by age 65, a whopping €285,396 more than he would have if he started investing 10 years later. The second chart shows the extraordinary difference in result that can be achieved by re-investing the dividends.

Fundamental 2;- Volatility is normal when investing in Equities

In every single year there will be a time where markets have slipped from previous highs. Equity markets will not increase uniformly day in day out. The graph below shows the actual return achieved by the MSCI Europe Index in each calendar year from 1980 to 2016. This is represented by the grey bar. The red dots, which are negative in every year show the intra-year decline from the high point to low point in that year. Every single year there is an intra year decline – there will be a high point and low point at some point in the year. But most importantly you will note the calendar year return has been positive in 29 out of 37 years.

Fundamental 3;- Diversification works

The chart below shows the return from each asset classes every year from 2007 to 2016. You can see that things jump around, some asset classes are top of the table in one year only to be the worst performer the following year. I think there are two main things to take away from this chart – (1) the average return from a diversified balanced portfolio (illustrated by the light grey box) has evened out the investment return (2) the worst asset classes to have been invested in for the past 10 years has been cash and commodities.

Successful investing is a long term endeavour. It requires discipline and a clarity of purpose. There will be times when returns are not as you would like them to be. It is at these times when the potential of making an investment mistake is most costly. In order to minimise this risk, keep at the forefront of your mind the three lessons contained within this communication. You should also be aware of, and comfortable with, the level of downside risk that your investment portfolio contains.  

I have changed the format of this regular communication. I have decided to focus on providing valued clients with helpful investment advice, rather than concentrating on providing a list of particular investment fund offerings. Naturally should you wish to discuss a particular investment fund, or evaluate whether a particular investment strategy suits your investment needs I would be delighted to do so. All feedback is welcome, so please let me know if there is anything you wish for me to address for you.

Kind Regards,

Gavin Gilmore                                                            t: 01 444 7620
QFA, FLIA, CFP, AITI Chartered Tax Adviser (CTA)         m: 086 383 5894