Taxbriefs Commentary Library

Educating clients about investment performance and risk

Danby Bloch, 18 May 2012


 

Helping clients to understand investment risk and their ability to cope with it is one of the most important but sometimes one of the most difficult tasks for a financial adviser. Psychometric tests have their place, but in my opinion there is no substitute for showing clients how different asset classes have performed in the past and in very different circumstances.

One thing is for sure; it is not good enough to look at the performance of asset classes over just the last dozen years or so. It really is necessary to look at a range of periods to see what has happened and what might take place in the future. And even that only gives a very rough and incomplete idea.

One of the best ways to look at the constant changes of investment history is to pour over the annual performance figures from a publication like the Barclays Capital Gilt Equity Study. You can get the full version from BarCap or there is a convenient greatly condensed one in the Taxbriefs Professional Advisers’ Factfile, which is a vast treasury of financial information.

In the Factfile, one key set of pages is a series of annual figures showing the value of portfolios of gilts, leading equities and also cash deposits. The figures show capital values after reinvestment of pre-tax interest and dividends. The results are shown before and after the impact of inflation. No account is taken for expenses and all figures are to calendar year ends.

The more you look, the more you learn. Here are some of the more instructive conclusions.

  • Cash deposits gave a positive return before tax during most of the late 40s, the 50s and the 60s. But they were disastrous in the 70s when inflation hit double figures. More recent cash returns have been positive until the last four years when low yields have been outgunned by higher inflation.
     
  • Gilts have provided investors with terrible returns for much of the post-war period and with surprisingly high volatility. Between 1945 and 1960 gilts lost half their value in real terms and nearly an eighth in nominal terms – even with the income reinvested. A brief rally in the early 60s was followed by a prolonged period of poor returns in the 70s when gilts lost about 40% of their value. They have performed well since the early 80s.
     
  • UK equities broadly performed well , if bumpily, from the end of WW2 until the catastrophic early 70s, when over a terrifying three year period they lost about 70% of their value in real terms. During the rest of the 70s and then in the 80s and 90s, UK equities were profitable if volatile, increasing their real value over 24 times between the low point of 1974 and the high point (on a year end basis) of 2000. Since then equities have been on a mildly downwards if volatile path.
     
  • Risk of loss from equities is closely linked to holding times. Compare five year returns of equities with 10 year returns. Equities outperformed cash deposits in 38 out of 51 five year periods (nearly 75% of the time).  Over 10 year periods, equities outperformed cash deposits 46 times out of 51 (90% of the time). So the longer an investor can sacrifice liquidity, the more chance there is of avoiding losses.

And the future? The future is still one of the trickiest things to predict.

 


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Danby Bloch

Editorial Director, Taxbriefs

Danby Bloch is the editorial director of Taxbriefs, chairman of city-based IFAs, Helm Godfrey and director of Nucleus, an independent wrap provider.

Over a period of more than 40 years, Danby has established himself as one of the industry's leading thinkers and  is a respected author, lecturer and trainer on tax and financial planning.

 

 

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