Transforming personal finance since 2011

#70 — "It does what it says on the tin..."


January 20th, 2021

By Andrew Craig

Reading time: ~ 4 minutes

Our new Fund Overview Document

Today I am delighted to be able to share our brand new and significantly upgraded "Fund Overview" document.

If you own our fund (the VT PEF Global Multi-Asset Fund), I would hope that you will find this particularly interesting and a restatement and reminder of what the strategy is and the evidence behind it as a long run investment product.

If you do not own the fund, please do consider having a trot through this document nevertheless, mainly because there is a huge amount in here that is fundamental stuff to investment overall, as well as to our fund specifically.

For example:

  • What record low interest rates mean for us all as investors.
  • Why human psychology is even more important than we realise.
  • A reminder of something called "the break-even fallacy" (and why it is incredibly important for your ability to succeed as an investor).
  • Sequence risk - something that could well make a six or even seven figure difference to your wealth over time.
  • The difference between accumulation (saving and investing) and decumulation (living on the money once you have enough to do that)...

We also revisit true diversification (i.e. across all main asset-classes and geographical regions) and look at the remarkable effect basic trend following can have on reducing risk and volatility over time.

Investing home truths....

As we explain in the document, there are a number of reasons why avoiding a significant fall in the value of your investments should be the number one consideration for many, if not most people when they consider investment, and most particularly for people at or near retirement.

A strategy which avoids ever falling 30, 40 or even 50 or more per cent in years like 1999/2000 or 2007/2008, will more than likely be an investment “tortoise” that "wins the race" over many years of investment.

This is because roughly once a decade, when all the nicely performing “hares” fall 50%, or even more than that - and the tortoise, perhaps only 5-10%, the hares then need to make 100% or more to catch back up - and this is actually pretty unlikely to happen - or, if it does, will take many years.

The price "the tortoise” must pay to achieve this result can be really quite long periods of time where it goes nowhere - as has been the case in our first three years - but this doesn’t change the probability of the long-run result, considering the evidence of many decades, and how maths work at the most basic level (i.e. the fact that a 100% return is needed to recover 50% loss - the "break-even fallacy").

A return profile like our fund “should” be better for long-run wealth preservation and growth than assets which can have very big up years (as the S&P 500 and plenty of other markets are doing at present) but are then highly likely to fall a long, long way every decade or so.

Mathematically - it only takes one big crash which unfolds over 2-3 years (as in 1999/2000 and 2007/2008 as I say) to erase many years of that great performance, for a fund like ours to then end up tens of percent ahead of those “better performing” assets and for those assets to quite possibly then never catch up (you can see this illustrated in figure 13 on page 37 of the linked document - copied below. Compare the light blue and green lines to the red line over a period of twenty years).

The fact that this hasn’t yet happened since we launched the fund in no way changes this likelihood (in my opinion). As many of the world’s greatest investors have repeatedly pointed out:

Time and patience are two of the most important factors in maximising your chances of long run investment success.

"Does what it says on the tin..."

Of course - I would also stress that our fund is only one possible component of how you might approach your finances. Like any investment fund, it is designed to do a specific job, and is therefore only relevant and “appropriate” for people who want that job done.

If you have been following all things Plain English Finance for any length of time, you will hopefully be more than aware by now that our message is vastly bigger and broader than "you should own our multi-asset fund".

Wherever you are on your investment journey I hope that, at the very least, you will find our new Fund Overview document interesting and another useful input into how you think about investment.

Until next time...