- Performance update for Home Base portfolio – 19.69% YTD
- Caution on why US stocks are poised for lower returns over next 10 years
- The benefits of long term compound growth
After a short, tortuous election over the Christmas holidays, the results are in: like it or lump it we have a majority conservative government led by Boris Johnson. In general, the market has responded positively. Despite the near term prospects of more no-deal-Brexit malarkey, there is at least a government in place with a clear mandate.
Grab a glass of red wine, a mince pie, and don your Christmas cracker hats folks, because if you stayed invested solidly throughout the year you’ve done very well!
Regardless of where you sit on the political spectrum – if you had invested in the Home Base Portfolio at the start of the year then you’re sitting on a tidy year-to-date (YTD) profit as we get towards the end of December 2019; as of December 19th the portfolio has returned 19.69% YTD and looks set to breach 20% by Christmas.
I wanted to set the bar very high, so what I have done is compared this to three common stock market benchmarks:
|HOME BASE PORTFOLIO VS KEY STOCK BENCHMARKS||2019 YTD|
|FTSE All Share||18.58%|
|S&P 500 Index||27.30%|
|MSCI All World Index||23.96%|
|Home Base Portfolio||19.69%|
|→ FTSE 100||16.90%|
|→ FTSE 250||27.63%|
|→ Vanguard All World High Dividend Yield ETF||17.47%|
|→ S&P Global Dividend Aristocrats ETF||15.79%|
|→ S&P Euro Dividend Aristocrats ETF||15.16%|
|→ Vanguard LifeStrategy 100% Equity Allocation ACC ETF||21.33%|
The S&P 500 has done what few people expected last December (when we were down nearly 20%) and rallied by 27.3% YTD. The fact remains that American stocks, and the widely followed S&P 500 benchmark for the 500 biggest businesses as ranked by market capitalisation, is one of the best performing asset classes of the past decade. This year it has smashed it.
The British FTSE All Share, unbeknownst to many, has actually done a decent job and returned 18.58% YTD. In comparison the Home Base portfolio has returned 19.69%, which gives you an extra 1% return (not too shabby for British investors!)
On the surface you’d think, “Well I should buy an S&P 500 tracker, or an MSCI World Tracker” to get the best returns. In fact at Frugal Investors we believe that European and foreign stocks are poised to out-perform over the next ten years. And neither the S&P 500 (100% US equity) nor the MSCI World Index (63% US equity) are particularly well diversified.
Something fascinating happening in the market
Bank of America Meryll Lynch has come out with several reports that suggest the next decade will involve radical changes “unlike any before it” as the world adjusts to climate change, social upheaval and economic recessions. The bank is explicitly anticipating that the 2020s will involve a global recession and economic slowdown.
There are several corners of the market that feel foreign stocks will outperform. Therefore putting all of your money into the S&P 500 or MSCI World Index (with that hefted weighting to the US) is a strategy that you’d need to tread carefully on.
This trepidation about what lies ahead makes perfect sense: we’ve had over 10 years of economic expansion, and governments and businesses are massively saddled with debt, having binged off of low interest rates and easy access to credit for almost a decade.
Not being invested in the market isn’t really an option. After all, for those of you who stuck with cash in 2018, because you expected mayhem in 2019 – well as it turns out, you’ve missed a 20% rise in the Home Base Portfolio and even higher rises in the MSCI World Index and S&P 500 Index.
That being said, having 100% of your money invested in these instruments and expecting 10-15% per year returns over the next decade is a recipe for disaster.
So what do you do? The primary strategy we recommend is the tried-and-true Buy and Hold strategy. Buy a balanced portfolio of stocks and fixed income that matches you risk tolerance. Then simply hold it – FOREVER. It’s easier said than done but 20-years-from-now you will thank you for having the stones to stick with such a simple strategy.
Frankly year-ago-me is patting myself on the back for banking a 19.69% return YTD. The British market was clearly undervalued and this was reflected in the fundamentals of the indexes.
BUY AND HOLD – Invest consistently and steadily because your favourite holding period is ‘forever’
One should take a careful and pragmatic approach to investing regardless of market conditions. That’s always a good approach. I know it has worked for myself and my family for many decades. Buy a balanced portfolio of stocks and bonds and buy it consistently, every month, re-investing income and dividends in the process to super-charge your returns and get compound growth.
What’s the first step towards doing this?
If you haven’t already have a look here for help on how to choose your appropriate risk tolerance. For me I sit at about 50% of my net worth invested in stocks and shares. I do not want to lose 50-60% of my capital in a downturn, so by having half my assets in stocks I will end up with a 20% maximum drawdown in a bear market.
If you wanted a 60% allocation to stocks and shares, then if you were following the Home Base Portfolio you would simply put more money into the Bonds segment of the portfolio (see full article here).
If you wanted a 60% allocation to stocks and shares through the Vanguard Lifestrategy Funds, then have a look at our guide on how to Self-Manage your Pension to Retire 13 Years Earlier. The investment product that you would explore for this is the Vanguard Lifestrategy 60% Equity Fund. Very similar to a pension, this is a stable and balanced portfolio of stocks and bonds that you could regularly invest in over a period of many decades.
Food for Thought
As you can see from the performance figures in Table 1 above – why would you invest in individual stocks and shares? A return of 20% in a year, although it doesn’t happen often, is a very difficult threshold to beat. I suspect a lot of private investors who buy shares directly wouldn’t even be able to tell whether they have beaten this threshold year-to-date. And in reality, many of them will not have when the account for their losses as well as their gains.
In fact I would go further than this: why would you try to time the market at all, when in a given year, against all odds you can end up with returns of 20-30% (20% in 2019, 33% in 2013, for example)? The second you sell all of your shares because of a Trump election (2016) or the worry of a Labour government in the UK (2019), the market does what you don’t expect. It rallies! Far more money is lost waiting for entry points than it is by simply being carefully invested in a balanced portfolio of stocks and bonds.
Buy-and-hold investing through passive ETF’s is a great strategy for building long term and sustainable wealth.
Market Timing Model (if you really must)
That being said, what if you worry about an upcoming stock market crash and that is preventing you from committing capital to the stock market?
Generally speaking I think people should shy away from any form of market timing unless they understand all of the basics of investing through a site like this and are prepared for the risks and rewards that come with this alternative approach. I think that few people are at this level, and for that reason I suggest you stick to the “Buy and Hold” investing strategy outlined above (and in many other forums).
However if you were to foray into market timing, I have thought long and hard how to cater for this audience and it has involved many false paths. What I have arrived at – more as an insurance policy against a significant bear market – is a market timing model that involves selling when the S&P 500 is below its 200 day moving average. Or for British investors when the FTSE All-Share is below its 200 day moving average.
It isn’t rocket science and the basics of the Market Timing Model can be found here.
After that have a look here for a recent update on the Market Timing Model.