Transforming personal finance since 2011

#5 — 18.51% from "owning the world"

March 23rd, 2016

By Andrew Craig

Reading time: ~ 3 minutes

I was prompted to write something today following a lovely email I had recently from a longstanding PEF client and friend. Said email hit my inbox with the title: “18.51%!!! ;-) ”. Attached to the email was a screenshot of their Hargreaves Lansdown account showing that their pension fund (SIPP) is up 18.51% since they started investing the ‘own the world’ way.

The account is basically invested 40% in Fundsmith, 40% in the 7IM AAP Adventurous Fund and 20% or so in Gold - an allocation that regular readers of our output will recognise as a pretty plain vanilla method of ‘owning the world’ that we’ve advocated for some years now.

There were a number of things that really made me smile about this email.

First, I actually know this individual very well so I am aware that not that long ago, one of his close relatives told him that these sorts of returns in a pension were ‘impossible’ and he would be best off sticking to property. He owns his own home - so, as far as he is concerned (entirely correctly in my opinion), this is more than enough exposure to UK property.

This reminded me that one of the problems many of us confront when deciding how to invest is the well-meaning involvement of people we love and respect. This can be particularly problematic when they are from an older generation since, what may have worked for the last thirty years (property investment for example) may not work for the next thirty. They can also often be quite forceful advocates for whatever it is they believe in which means we need to have real courage in our convictions to side-step the (unintentional) siren-song of doing things their way.

For the avoidance of doubt - I am not a bear of property (something I am often accused of). The whole point of ‘owning the world’ is to do your best to own all assets in most (if not all) geographies and this absolutely includes property. I do, however, think that many people have fundamentally imbalanced finances when all they have is property and the dangerous belief that it goes up forever (it doesn’t, especially when it is structurally overvalued and interest rates are the lowest they have been in 300 years). If you own your own home, this is probably more than enough exposure to property unless you are very wealthy.

The other thing that I really enjoyed about the email and the screenshot was that it neatly reinforced the merit of ‘owning the world’. Why? Because ever since this person has bought the Fundsmith funds, they have done well (Fundsmith has achieved an average 17% performance per annum for five years for what it is worth) but his gold position had not, serving as a drag on his performance over-all. As many of you know, gold has not performed well for a few years (although it has actually still averaged over 10% per annum for 15 years - which I’d imagine compares pretty favourably with your current account).

So far in 2016, gold is up over 18%. I do not have a crystal ball but it is entirely possible that the stock market may crash this year as so many people seem to think - in which case his Fundsmith fund certainly won’t be up 17% again. In this scenario, however, his gold will very likely go up a great deal.

The beauty of his approach is that he really doesn’t have to care what happens. He invests regularly and is diversified. If there is a crash, he will be buying back into good quality funds at a lower price and his gold (and other investments) may well keep his money growing along nicely anyway. As I always say, high single digit or low double digit returns over a life-time will more than achieve most people’s financial goals and this approach has a multi-decade track record of achieving these sorts of returns.

I think it is wonderful that he is up 18.51%, not least because he is a dear friend, but I don’t for a minute think that he will make that return every year. I do, however, firmly believe that if he sticks to his fundamental investment plan of being broadly diversified by asset and by geography and of investing regularly and ignoring the disorienting ‘noise’ of the news, he will do very well over time.

In my next piece, I will explain more about something called ‘rebalancing’ using the above person as an example.

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