Lessons from 20 years of investing

We must take past investment performance with a pinch of salt – it’s why the UK’s financial regulator advises that it’s not a guide to the future. But that’s not to say it isn’t stocked with pearls of wisdom. If we examine the performance of financial assets over long periods of time, it can give us a feel as to their wider behaviour, which can help us craft sensible long-term investing strategies for our own portfolios.

Stockbroker interactive investor (ii) recently looked at the performance of a host of different financial assets over a lengthy 20-year period. By analysing the good times and the bad, it uncovered a crucial and timeless strategy for investors. Thankfully, it’s remarkably simple to employ.

First, let’s take a look at the numbers.

AND THE WINNER IS…

Below are the returns of different financial asset classes and geographical stock markets across the world over two decades, in order of best to worst performer. A motion graphic created by ii can be found on YouTube here.

Source: interactive investor using Morningstar monthly data on GBP total returns basis from 31 August 2003 to 31 August 2023. China, Brazil, India and Europe are MSCI indices. UK government bonds is FTSE Act UK Cnvt Gilts All Stocks TR GBP, UK real estate is FTSE EPRA Nareit UK TR GBP, US tech is Nasdaq 100 TR USD, Gold is S&P GSCI Gold TR, Cash is SONIA Lending Rate GBP. Past performance is not a reliable indicator of future results.

The lessons are revealing, perhaps more so for some than others. Here are five that jump out of the numbers.

1) Shares are vital to long-term returns

At times, the twists and turns of the stock market can feel like a tense soap opera: drama meted out through volatility in the value of shares. But as the top six categories remind us, investing in shares is essential if we are to build wealth over time. Quite remarkably, US technology shares delivered more than three times the returns of gold over the period examined, and even the lowest-performing equity category – Japan – still beat commodities, UK real estate, UK gilts and cash.

Though the ride might be rough, investing using portfolios of shares such as Alliance Trust tempers downside risk and excessive volatility while keeping you exposed to the necessary equity risks needed to make a decent long-term return.

2) Performance is inconsistent

Another clear lesson surrounds the reliability of broader stock market performance. Unforeseeable headwinds – top-down macroeconomic or geopolitical forces – may crimp the performance of groups of stocks or even entire markets, sometimes for long periods.

A good example is in the winning category: US tech, as viewed through the lens of the US technology index, the Nasdaq. From 2000 to 2003, all hell broke loose in technology stocks, as the wildly lofty valuations of fledgling internet companies came crashing down to Earth. A recovery ensued, and yet, by 2009, the Nasdaq was still underperforming cash. Since then, from early 2009 to August 2023, the Nasdaq has gone on to return more than 1,700%.¹

Predicting and timing the successful run would have been impossible: the web of forces driving markets is unendingly complex. What’s best, is to spread your investments widely to ensure you catch the good times wherever they occur.

3)  Emerging markets are a key part of your portfolio

Particularly interesting in the data is the exceptional performance of emerging markets, with individual country indices for India, Brazil and China sitting at positions two, three and four respectively.

Some investors may be tempted to avoid emerging markets, given the perception of elevated economic, political and governance risks, even though they represent the world’s fastest-growing and most dynamic economies. But these risks can be managed by professional teams of specialised stock pickers, such as those in the Alliance Trust stable, who are able to use their expertise to sift through indices to find extraordinary companies to invest in.

Extending your investment reach beyond the (seemingly) safe shores of developed markets into emerging ones is important to your financial goals, and serves a long-term investing strategy well.

4) The UK does well on account of dividends

There’s no doubting that the capital returns of UK equity markets have been lacklustre over the past few decades, and for a host of reasons. These include reduced investor appetite on account of political volatility and events such as Brexit, but also because UK pension funds have been divesting their portfolios away from UK shares, leading to continuous selling pressure that has dragged on prices (former star fund manager Richard Buxton discusses it here).

That said, UK companies come with a culture of strong corporate governance, and the importance of dividends is not lost to boards. When performance is examined on a total return basis, it is this dividend discipline that boosts the overall performance of UK markets.

What’s more, fortunes are likely to change in the coming years, as politicians begin to turn their attention to the Footsie, and talk up strategies they believe will encourage more listings in London and revive its tiger spirits.

Keep the faith in your home market – the UK is an essential part of any portfolio.

5) Cash is bottom of the pile

The risk-free returns of cash – currently 5.25%² for easy-access savings accounts – make savings appealing at the moment, especially in the face of simmering economic uncertainty. But cash sits at the very bottom of the table, demonstrating how, although relatively risk-free, it isn’t a particularly smart approach to building wealth. Moreover, although rates are currently attractive, if inflation continues its descent towards the Bank of England’s 2% target, then interest rates and therefore savings rates may start to follow in lockstep.

There’s no doubt that cash is important for your short-term goals and needs, but over the long term, investment risk-taking is required, if you hope to meaningfully boost your wealth over time.

IT ALL POINTS TO ONE INVESTING APPROACH

Harry Markowitz, the Nobel Prize-winning economist whose work on Modern Portfolio Theory underpins the risk-managed portfolio approach to investing, once said: “diversification is the only free lunch in investing”.

All told, the data delivers a clear, overarching message: investing in a balanced and truly globally diversified portfolio of shares, offers a strategy that is likely to capture the upside in the unpredictable places it develops and build wealth for your future, while simultaneously managing the downside risks of issues with individual companies or indeed certain markets or regions.

Furthermore, it validates Alliance Trust’s approach, which uses a team of ten Stock Pickers selecting the very best company shares around the world, in both developed and emerging markets, to form a broadly diversified portfolio across stocks, sectors, geographies and investing styles, aiming to grow both capital and dividends over the long term.

Marcus de Silva is a Freelance Investment Writer

1. https://www.google.com/finance/quote/.IXIC:INDEXNASDAQ?sa=X&ved=2ahUKEwjMrM3h9J2CAxWzU0EAHVsoACIQ3ecFegQIHBAX 

2. https://moneyfactscompare.co.uk/savings-accounts/

This information is for informational purposes only and should not be considered investment advice. Past performance is not a reliable indicator of future returns. The views expressed are the opinion of Towers Watson Investment Management (TWIM), the authorised Alternative Investment Fund Manager of Alliance Trust PLC, and are not intended as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell any securities. The views expressed were current as at 20 November 2023 and are subject to change. Past performance is not a reliable indicator of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. You should not assume that any investment is or will be profitable. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.  

TWIM is authorised and regulated by the Financial Conduct Authority. Alliance Trust PLC is listed on the London Stock Exchange and is registered in Scotland No SC1731. Registered office: River Court, 5 West Victoria Dock Road, Dundee DD1 3JT. Alliance Trust PLC is not authorised and regulated by the Financial Conduct Authority and gives no financial or investment advice.