Ajarn Finance

The decade of zeros

Looking after teachers looking after their finances

A Happy New Year to all! Perhaps we should say Happy New Decade since a year is too short in financial planning. Before we look forward, let's look back and take stock of how the last 10 years have affected investments.

2000 - 2009 - THE DECADE OF ‘ZEROS' This is how many will sum up the results of their investments during this period. Although 2009 itself produced a remarkable recovery from the late 2008 meltdown (highlighting again the importance of ‘hanging in' when things get bad) it did not prevent the decade from becoming one of the worst in the history of investing. Using the S&P 500 as one of the main benchmarks, the market saw a fall of close to 25%, its first ever losing decade. Even with the reinvestment of dividends the loss would still be almost 10%. If the USD is not your base currency you will have seen a further loss of 23% against a basket of major currencies. Some exchanges in Europe performed even worse, with losses ranging from 35% to 70% over the decade.

Bonds did better. If you were in a traditional US or British pension plan or portfolio with a 60/40 equity/bond split you would have made a small return of around 1.5% to 2.5% per annum over the period, but most of this would have been wiped out in charges. Many commercial property and hedge funds became distressed and are currently frozen. For most people the best strategy during the decade, contrary to all investment theory, would have been to leave their money in the bank - provided the bank survived the meltdown!

WHY WERE THINGS SO BAD? To start with, the figures are a little bit skewed because markets ended the 90's on a high. But the next decade saw two major market crashes, the impact of 9/11, wars in Iraq and Afghanistan and finally the banking crisis and credit crunch.

BUT NOT ALL INVESTMENTS WENT DOWNHILL On the contrary, there were some star performers during the period. Those who were prepared to venture into perceived riskier investments saw huge gains in emerging markets. These ranged over the decade from 150% in China, 270% in India to 500% in Brazil and almost 700% in Russia. Commodities also enjoyed a boom. Gold has more than tripled in price. Property prices rose significantly in most countries but the credit crunch brought them crashing down from their highs.

SO HOW DID YOU FARE OVER THE DECADE? Variable at best since you will almost certainly (and theoretically correctly) have had a large portion of your investments in the major markets. But if you have been a long time with any of our team the chances are you will have done better than the 25% or greater losses of the major stock markets. If your portfolio or savings plan include emerging markets, gold, precious metals, base metals, energy or virtually any commodity, the gains will have helped to offset the losses in the major markets. We have also made good use of the managed futures funds which, while negative in 2009, strongly outperformed all major stock markets over the decade. Some went into one of the Australian Dollar product versions offered by Man Investments (OM-IP) and enjoyed a significant currency gain as well.

The actual performance of your portfolio or savings plan will depend of course on the timing of your investment. If you made a lump sum investment at any of the peaks in the markets you will still be counting the losses. If on the other hand you were bold (or just lucky) enough to invest when markets were at their lowest you could be looking at some quite significant gains. As high as 100% for example if you invested in a China fund just nine months ago! Most Asia-Pacific stocks are up around two thirds over the year.

BUT WHAT ABOUT THE NEXT DECADE? The temptation is always to follow yesterday's success stories. If you do so, you may decide to play safe and put all your money into bank deposits. Or you may choose to be bold and put everything into emerging markets or commodities on the assumption that they will continue to bring in high profits. But experience tells us that nothing in the investment world stays the same for long. An extreme example is that of the top five equity funds in the UK at the start of 2000. Five years later not one was even in the top 500! You have to keep reviewing the situation.

At the moment analysts are still telling us that emerging markets and commodities are the place to be as we enter 2010. They are probably right but be prepared to reduce your holdings when just about everyone has jumped on the bandwagon.

With best wishes for 2010 and the new decade!

Eric Jordan

Managing Director, Professional Portfolio International

Contact Eric / View PPI website


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