Long term returns

Long term returns

Photo by Johannes Plenio on Unsplash

After the year we experienced in 2020 it seems appropriate to remind ourselves that when we invest in equity markets, we should be doing so for the long-term.  2020 was an incredible year for a lot of negative reasons and, although we’d all like to forget it, unfortunately, it’ll live long in the memory.  From an equity market perspective the year provided us with a reminder of just how volatile markets can be but it also showed us that for those of us who stick to their plan and remain invested it could still provide positive returns… even in a year as strange as the last one.

If we didn’t check our investment portfolios throughout the days and weeks of 2020 and just looked at the value at the beginning and end of the year, we might have been surprised to learn of the volatility that happened during the year.  A good example of this is to look at the MSCI World Index, which gained circa 13%, in sterling terms, in 2020.  This was despite a considerable downturn in March caused by the pandemic with which we’re all too familiar with now.

Obviously, the majority of us wouldn’t have been 100% invested in a portfolio which mirrored this index.  The MSCI World Index is a representation of the global developed equity markets, capturing large and mid cap companies across 23 developed market countries.

However, even in a more balanced and more diversified portfolio containing emerging markets, global property companies and defensive assets such as short dated bonds, most portfolios will have finished the year either slightly into positive territory or with no significant losses.  Certain asset classes haven’t performed as strongly as others such as value stocks, global property or smaller companies but, overall, most investors shouldn’t be disappointed with 2020 given the returns they experienced in the first quarter.

This is one of the main reasons why we suggest not looking at your investment portfolio too often.  In fact, even though it’s encouraging to look back at 2020 and see that the year ended with better returns than you might have expected back in March and April, we should really be looking at a much longer period.

If we look at the MSCI World Index again as a proxy for equity returns, we can see that the ability to stay the course and remain invested results in the best long-term outcome.  Holding our nerve and not making emotional decisions when markets are falling, such as was the case last March, is one of the keys to a successful investment experience.  We only have to look at the index returns over longer periods to see the returns equity markets can provide.  The annualised return of the MSCI World Index over the 10 years to the end of 2020 is c.12%, again in sterling terms.  If we go back even further to when the index started on 31st March 1986, the annualised return to the end of December 2020 is 9.36%.  Obviously, there has been volatility during this period which is why most people are not invested in a portfolio which entirely matches that index.

What this clearly highlights is that when looking at long-term investing, compounding and time are your friends. We should all be concentrating on the long-term when taking the risk of investing in equities.  This shouldn’t be difficult if you have a financial plan as, unless you don’t have long to live, it’s highly likely that most people’s financial plan has at least 30 or more years to run.  Even if you don’t expect to last that long yourself, your portfolio may outlive you and continue to deliver returns for the next generation.

It also doesn’t mean that you should necessarily measure your investment portfolio against the long term return of MSCI World Index.  For one thing, it doesn’t take into account any costs which is not the reality for most investors and only includes developed equities.

I’ve only used this index as an indication of the return possible from developed market equities.  As I’ve said before, it’s not the relative return of our portfolios against particular benchmarks that is important, but rather the return we need after inflation and costs to achieve our goals.  Once we’ve identified what we’re trying to achieve and have a plan in place to get there, any investment returns that we achieve should be based on what we need and be enough to keep us on track to live the life we want to lead.  This is the true measure of a successful investment experience.

So after years such as 2020 when equity market returns looked particularly bleak and the news seemed to be constantly depressing, it’s worth remembering that in a long-term context these tend to be mere ‘blips’ both in terms of returns and life itself.  I know it’s hard, particularly now and in the recent past, to see any positives but in the same way as investment returns look better over the long term I’m hopeful that so will the rest of our lives and 2021 will be more positive than 2020. 

The human race is very resilient and has the ability to innovate and be dynamic, especially when forced to do so. Technology will continue to improve our lives and should not only help us get through the current pandemic but also mean that investment markets continue to provide the long-term returns we need to fulfil our goals… just don’t look at your portfolio too often.

I don’t know about you but one of my hopes for 2021 is that I’ll be able to get back to going to see live music, but if this doesn’t happen I’m sure it will in 2022.  When I look back on my life in years to come 2020 and 2021 will merely be ‘blips’ in my pursuit of the next gig!



This blog is intended for information purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.  Your capital is at risk when investing.  Past performance is not a reliable indicator of future results.