Beating the FTSE 100

masonic

gadgetmind wrote: »

Yes, that period starts from a market uber-high. Anyone switching all their cash into the markets at that point has had a bad time. The other 99.999% of people have done just fine.

That's a very good point. I'm sure the OP didn't invest everything in December 1999 and hold it until now without adding to it.

Just out of interest, I pulled out the FTSE 100 TR data for the last trading day of each calendar year from 1999 and checked what the return would be if investing £1000 per year on those dates. The total would come out at £25,500, which is an annualised return of 6.7% (using Excel's XIRR function) - much better than the 3.2% annualised return from a lump sum invested at the end of 1999.

IronWolf

TBC15 wrote: »

There is some disturbing information coming out.

60% TR over the time period makes me feel like Warren Buffet. I’m obviously not. From the seasoned investors out there what do they regard as an average return worthy of the effort?

I'd say 15-20%+ a year compounded over time is a fair target.
There's no way to know beforehand if you have what it takes to beat the market, you gotta have the cojones and self belief to go for it.

bowlhead99

IronWolf wrote: »

I'd say 15-20%+ a year compounded over time is a fair target.

I'd say it is a completely unfair target as it is substantially higher than typical largecap equities. Even assuming you were equities-heavy in your portfolio and aiming for riskier punts: for every bit that you throw money into smallcaps and EM and specialist funds which in a good year can drag you up towards that level, you should also be putting some money into some safer stuff to be able to handle the poorer years.

Consider what happens if you lose 20% three years in a row, during a recession - quite feasible even without using super risky specialist funds. Your £100 goes down to £51. From that point, you could get very lucky and get a couple of +50% years in a mad rebound, and five of your 'normal' +15% years to round off the decade and you will be up to £230. And perhaps some people would think that was a nice return to aim for. But annualised that 130% return over a decade is less than 9%.

If you are suggesting a fair target is a compound annual return of 15-20%, maintained over say 10 years, you're talking about quadrupling to sextupling your assets every decade. Without any contributions, just investment returns. That is a long way removed from reality unless you are picking very high risk options with a pretty high chance of being wiped out beyond any reasonable recovery within the decade.

Something more reasonable would be to assume that equities will broadly get you 8-9% over time, or inflation plus five or six - if you're looking at slightly riskier options than the average. And then if you want to properly beat the average joe, you could perhaps set "long term compounded double digit growth" as your target.

It's good to have challenging goals but 20% is setting yourself up for failure.

gadgetmind

IronWolf wrote: »

I'd say 15-20%+ a year compounded over time is a fair target.

Which active fund managers have achieved this over multiple business cycles?

Glen_Clark

IronWolf wrote: »

I'd say 15-20%+ a year compounded over time is a fair target.

I think you would have a better chance of achieving that by investing in your own business, than investing in someone else's.

IronWolf

gadgetmind wrote: »

Which active fund managers have achieved this over multiple business cycles?

Quite a few, Buffett, Walter Schloss and Prem Watsa being the most famous, but there are others although they are not typical 'fund' managers, they are hedge funds and pretty closed shop. Many other smaller investors that just invest their own money get those kind of returns too.

IronWolf

bowlhead99 wrote: »

I'd say it is a completely unfair target as it is substantially higher than typical largecap equities.

Who said anything about large cap equities? A small investor would be foolish to invest in large caps, the best opportunities are in tiny companies.

Even assuming you were equities-heavy in your portfolio and aiming for riskier punts: for every bit that you throw money into smallcaps and EM and specialist funds which in a good year can drag you up towards that level, you should also be putting some money into some safer stuff to be able to handle the poorer years.

Consider what happens if you lose 20% three years in a row, during a recession - quite feasible even without using super risky specialist funds. Your £100 goes down to £51. From that point, you could get very lucky and get a couple of +50% years in a mad rebound, and five of your 'normal' +15% years to round off the decade and you will be up to £230. And perhaps some people would think that was a nice return to aim for. But annualised that 130% return over a decade is less than 9%.

If you are suggesting a fair target is a compound annual return of 15-20%, maintained over say 10 years, you're talking about quadrupling to sextupling your assets every decade. Without any contributions, just investment returns. That is a long way removed from reality unless you are picking very high risk options with a pretty high chance of being wiped out beyond any reasonable recovery within the decade.

Something more reasonable would be to assume that equities will broadly get you 8-9% over time, or inflation plus five or six - if you're looking at slightly riskier options than the average. And then if you want to properly beat the average joe, you could perhaps set "long term compounded double digit growth" as your target.

It's good to have challenging goals but 20% is setting yourself up for failure.

If people don't think they have what it takes to make 15-20% a year then they should stick to trackers or let a top manager take care of it for you by buying any number of US insurers with prolific investors heading them. There is no point aiming for 10% a year when you can just buy some Berkshire stock and get that with no effort.

Investing requires confidence in yourself, without it you wont make rational decisions and will get scared out of investments at the worst possible times.

bowlhead99

IronWolf wrote: »

Who said anything about large cap equities? A small investor would be foolish to invest in large caps, the best opportunities are in tiny companies.

Large caps represent the largest investible market, assuming one is looking for a long term return based on profits of companies (i.e. a better return than fixed interest / bonds type stuff).

So, someone like the OP who invests across OEICs and UTs (presumably multiple asset classes but with an equity tilt because he has suggested FTSE as his own benchmark), should give some consideration to the performance of those largecap equities when deciding how his own performance stacks up.

As I mentioned, he would hope to outperform them by using more volatile higher risk / higher reward holdings but this can be quite dangerous and not suitable for many people, even if the returns are ultimately what they want. If it is what he wants, and he wants to benchmark his portfolio, to see what he should take as a 'fair return' on something designed to outperform the FTSE or the S&P by going higher up the risk scale, then it would maybe make sense to say 'FTSE plus a few percent'. This then gives you a benchmark tied to market conditions and an acknowledgement that you do expect to beat the market because you don't want to invest in just the basic mainstream stuff.

His previously-mentioned arbitrary '10%' target might be OK long long term but if it doesn't consider interest rates and inflation rates and the economic environment properly over that period, it is not a great 'benchmark'. If you observed a few years of overall negative returns on the public equity markets it is better for your portfolio to be benchmarked at beating 'those returns plus a bit', than an absolute positive value of 10% as he used to use. Because +10% over those periods might not be very realistic using collective investment schemes when all the major markets are down.

I suppose you can say that some positive absolute target is better than 'beat the FTSE' because in the bad years when all equities are dropping perhaps you should be in bonds or real estate or some type of commodity instead, and get yourself a more ideal, positive return. However someone trying to shoot the lights out by using tiny companies or riskier sectors is likely not going to have a lot of that low risk stuff at the right time unless he is supremely skilful or supremely lucky. And so some negative return might be expected.

In other words, Buffet dropping 10% in '08 when the S&P dropped 30-40 was not a result to be ashamed of... but setting a benchmark return of +20% for that year would have been useless for assessing whether you did well or not. It would just mark you as a big failure when in fact you did reasonably OK for the circumstances and certainly a lot better than someone solely using a cheap index product as many advocate.

If people don't think they have what it takes to make 15-20% a year then they should stick to trackers or let a top manager take care of it for you by buying any number of US insurers with prolific investors heading them. There is no point aiming for 10% a year when you can just buy some Berkshire stock and get that with no effort.

I don't think the choice is just 'believe you can get 20% year in year out or it's not worth doing'.

Buffet himself reportedly believes that if you don't have billions to buy access to well researched special opportunities and a massively experienced investment team, the man on the street might as well just get a tracker. But clearly some of those statements he makes are simply marketing stories to say that averagely managed conglomerates and mutual funds don't perform very well and rather than sift through hundreds of them and pay their management fees, you might as well get a cheap tracker. Or of course, buy Berkshire which has done 19.8% compound since 1965.

Your idea that you should have the self-belief and ego to 'go big or go home' is interesting but surely you can see that 20% is not a 'fair target' against which the man on the street should assess himself.

There is a certain amount of logic to the concept that we shouldn't want to 'aim' for mediocrity, and so the man on the street should just buy an off the shelf fund portfolio if he is not going to try very hard. If he doesn't want to try and outsmart the market why not just accept a balanced fund from one fund manager out of the thousands. But given he would not know which one of those thousands to pick, presumably he would still want to benchmark that against some sort of reasonable market return for the investment risks being taken.

What we are saying is, what is the level at which you are satisfied you had done 'a fair job' and got a 'fair return'. If one of the most famously successful men on the planet has created a portfolio at Berkshire that delivered 19.8% annualised over 50 years, that's great going. To say to yourself, right then, so my target is 20% because that's what the best guy on the planet (that I ever heard of) got, is ambitious to say the least.

Investing requires confidence in yourself, without it you wont make rational decisions and will get scared out of investments at the worst possible times.

Agreed, self belief and having the courage of your convictions is important (even if it seems expensive, because giving up and getting scared out at the worst time is perhaps even more expensive).

But I'd propose that believing you can mix it with the best of the world is just a delusion for many and if > 95% of people don't make 20% compound a year for the long term then that is not a very useful benchmark/ target/ hurdle because you will be doomed to fail.

If you're simply saying don't bother trying to make your own portfolios when you can get someone to sell you one or advise you on one that will give you high single digit returns, I suppose that's fine.

But I (and I guess others) read it that you thought any OEIC portfolio should just be compared against a 20% target rather than a FTSE target, which to me really does not give you useful results because for every multi-decade measurement period you will generally always be on the same side of the benchmark. If you were graphing out returns and 98% of the time you fell into the same part of the graph (i.e. below the 20% compounded) then it tells me the scale is in the wrong place.

coastline

A few links ...

Looking at funds with a long term track record of a least 20 years the best are showing 13-17% annual return.

http://www.trustnet.com/News/516510/the-flagship-funds-that-have-made-the-most-money-since-launch/1/1/

Articles showing total returns.

http://www.marketoracle.co.uk/Article19858.html

http://financeandinvestments.blogspot.co.uk/2014/01/1980-2013-stock-market-returns-for.html

Although the FTSE 100 hasn't had the best of runs in recent years its still showing a near 10% return with dividends reinvested since launch 30 years ago.
6.5% without and 9.8% with the dividends.

http://www.trustnet.com/Tools/Charting.aspx?typeCode=NUKX

masonic

coastline wrote: »

Looking at funds with a long term track record of a least 20 years the best are showing 13-17% annual return.

http://www.trustnet.com/News/516510/the-flagship-funds-that-have-made-the-most-money-since-launch/1/1/

It's a shame they didn't include a table of funds that will give a 13-17% annual return over the next 20 years...