Portfolio Return?

We get asked a lot about expectations for portfolio returns over the next year.  The answer is the same, we don’t know.  Some people feel uneasy when we answer saying we don’t know but it’s the truth.  It doesn’t mean we can’t analyse assets as to their potential and build portfolios to meet objectives, it means that we don’t know how investors will react to unknown short-term economic data.  The probability of the US equity market being positive on any particular day is just over 50%, so pretty much a flip of a coin (data since 1936).  The probability of the US equity market being positive over any year is 77%, so good odds.  However, the question is the wrong one.

Patience is the key

You don’t have to look far to see that patience in society is waning with all aspects of life increasingly focusing on short-termism.  TikTok is changing social media with the average video length of the top 100 viewed TikTok videos being 15.6 seconds.  A TikTok user survey said that they found videos of over 1 minute ‘stressful’.  I’m a Leicester City season ticket holder and we have the same manager that we started the season with, however 8 of the 20 Premier League clubs have changed their manager and we’re just over half-way through the season.  Of the 92 English League clubs, only six managers have been in the same role for over five years and 55 of the 92 clubs have had their manager in place for under a year, which hardly helps with recruitment, training, development, teamwork, and planning anything.

The same short-termism is common in investing.  According to Reuters, the average holding period for a stock on the New York Stock Exchange is now 5.5 months.  One of best investment quotes comes from Charlie Munger, the still going strong 99 year-old Vice-Chairman of Berkshire Hathaway; “You don’t make money when you buy and you don’t make money when you sell.  You make money when you wait”.

If the original question was will you get a positive portfolio return over the next five years, then the odds become much more favourable.  Using US data since 1950 and a 50% equity, 50% bond portfolio, there has never been a 5-year period where annual returns have been negative.

Importance of financial planning

A key reason for short-termism in investment markets is a lack of planning (I would argue the same for football too), which creates emotional stress and panic.  Investors often don’t know what they are investing for.  This is why we combine financial planning with investment management.  Without financial planning, investment management is abstract with no objective.

Our portfolios are managed with a minimum three-year term in mind.  That might be too short, however it is a minimum and allows us to think longer term.

If you want to understand our portfolios or how we combine financial planning with investment management, please get in touch with any of the team.

Thanks for reading.