Investment expectations

donjuandisco

Guys,

I know this is going to be a really difficult question to answer but I'd appreciate a shot at it, if you could.

I'm looking to invest some money, a lump sum say £30K. If we presume risk can be measured on a scale of 1 -10 with 1 being no risk and 10 being high risk and I was willing to accept a risk vlue of 5. What kind of return would you expect ?

:beer:

dunstonh

1/11/01 to 2/10/06

Risk level Total return (%)
Risk 1 17.45
Risk 2 30.63
Risk 3 43.12
Risk 4 47.60
Risk 5 52.91
Risk 6 58.56
Risk 7 60.92
Risk 8 66.07
Risk 9 62.99
Risk 10 61.33

That is sector allocated portfolios with sector average return only with annual rebalancing. So, Risk 5 would have returns 52.91% over 5 years which is just over 10% p.a. average. This is in unit trusts directly.

ReportInvestor

dunstonh wrote:

So, Risk 5 would have returns 52.91% over 5 years which is just over 10% p.a. average.

What grade did you get in your Maths O Level :rotfl: ?

8.9% pa should more than do the trick.

Still, with Maths undergraduates asking ordinary punters on MSE how to work out the rate on Regular Saver accounts nothing surprises me anymore about the UK education system :rolleyes:.

strawberrylane

Would you agree though that in order to achieve a potential 52% return over the next 5 years one might have to go up the risk scale by a notch or two? Or conversely, one might be wise to expect a lower potential return (lower than 52%) over the next 5 years at risk level 5?

dunstonh

ReportInvestor wrote:

What grade did you get in your Maths O Level :rotfl: ?

8.9% pa should more than do the trick.

Still, with Maths undergraduates asking ordinary punters on MSE how to work out the rate on Regular Saver accounts nothing surprises me anymore about the UK education system :rolleyes:.

52.91 divided by 5 = 10.582%

Would you agree though that in order to achieve a potential 52% return over the next 5 years one might have to go up the risk scale by a notch or two? Or conversely, one might be wise to expect a lower potential return (lower than 52%) over the next 5 years at risk level 5?

Obviously you need to remember that what you are asking needs a crystal ball to answer.... I would say that risk 5 is likely to perform a bit better but not much whilst lower risk are likely to perform a little worse. Over the long term, with sector allocated portfolios and rebalancing, the returns to tend to be more stable than invest and forget or single sector/fund investing.

You do have note that those figures are sector average only. Pick a handful of funds that perform and it gets better. I have a number of risk 5 portfolios that doubled in that period because the fund selection achieved above sector average. However, it is prudent to use sector average when working out possible scenarios. Have an expectation of 52% over 5 years and if you get it you will be happy. If you get 100% you will be overjoyed. If you have an expectation of 100% and get 52% you will be disappointed.

Market_Oracle

Its 8.9% AER per year (compounded to 52.x%).

Which i think what reportinvestor is implying

Market_Oracle

donjuandisco wrote:

Guys,

I know this is going to be a really difficult question to answer but I'd appreciate a shot at it, if you could.

I'm looking to invest some money, a lump sum say £30K. If we presume risk can be measured on a scale of 1 -10 with 1 being no risk and 10 being high risk and I was willing to accept a risk vlue of 5. What kind of return would you expect ?

:beer:

Risk 5 would probably equate to a FTSE index tracker, not done so well up about 17% over the last 5 years ! Thats about 3% AER

Best strategy would be to split your 30k portfolio up

say 50% no risk, 20% low, 20% medium and 10% high

prudryden

Market_Oracle wrote:

Its 8.9% AER per year (compounded to 52.x%).

Which i think what reportinvestor is implying

Sorry for the intrusion here -- I think you guys are misinterpreted what Dun said. It is difficult to compound an investment which may have good years and bad years. Therefore, Dun is correct. It is the average annual return -which would equal the total return over 5 years.

However, although the OP stated his risk factor, he didn't mention his time horizon.

Market_Oracle

For comparative purposes AER should be used, otherwise the figures are misleading.

I.e. you can get 6% no risk, and 8.9% medium risk, AER.

dunstonh

Prudryden is correct. You cant measure it the same way. You can only take the averaging. In theory, you could have had 4 years of nothing and 52% in one year. Therefore averaging the investment return is the logical way of doing it (and that is the way the various investment houses do it).

For comparative purposes AER should be used, otherwise the figures are misleading.

I.e. you can get 6% no risk, and 8.9% medium risk, AER.

I would say that way is misleading as its not a constant return.

Risk 5 would probably equate to a FTSE index tracker, not done so well up about 17% over the last 5 years ! Thats about 3% AER

Risk 6-7 would cover the various FTSE index trackers.

Those figures I posted are actual figures on sector allocated porfolios using the watson wyatt spread with annual rebalancing. The data was supplied by Financial Express Analytics. They used unwrapped UT/OEICs (meaning an ISA would be a little better and a pension too subject to charges differences).

ReportInvestor

dunstonh wrote:

Prudryden is correct. You cant measure it the same way. You can only take the averaging. In theory, you could have had 4 years of nothing and 52% in one year. Therefore averaging the investment return is the logical way of doing it (and that is the way the various investment houses do it).

So an investment house could produce returns of 10% pa for ten years and tell the public that returns over ten years have "averaged" 16%?

Neither very logical, nor very likely :rolleyes:. That would be deception, pure and simple.

Your logic also virtually removes the concept of compounded investment growth. We all know it doesn't go in straight lines, but it's still an important educational idea.