Beating the FTSE 100

IronWolf

coastline wrote: »

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

Interesting, so add back on the 2% management charges and you get my 15-20%.

I wouldn't want to pick a FTSE 100 tracker anyway, not very balanced, I'd rather get a global tracker.

IronWolf

bowlhead99 wrote: »

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.


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.


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.

Noones saying to aim for 20% every year, you'll have some years above it and some years way below and down. But over time you should believe you can get those kind of returns, or just stick with a tracker or good manager.

Buffett himself said a few years ago that if he was a small time manager with only $1m to invest he could make 50% a year.

masonic

IronWolf wrote: »

Interesting, so add back on the 2% management charges and you get my 15-20%.

Hmm, not sure about that. A private investor with limited capital trying to reproduce what these fund managers did would surely have higher trading costs, more than offsetting that 2%?

BillJones

gadgetmind wrote: »

Small print: Your guarantee is only as good as the financial institution backing it, so not really guaranteed at all when it all goes wrong.

No, that's simply not true. I could, for example, construct the strategy such that I receive the returns upfront, so am facing no-one's credit.

The point I'm making is that you can construct a strategy that wins any fraction of years that you choose, but that also loses on average, and since you can't know in advance which year will be the down one, it's a rubbish strategy.

Thrugelmir

coastline wrote: »

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.

To make sense of this data. You also need to consider the underlying factors. Low base points for equity valuations, improved Company profitability due to technology and working practices, periods of high inflation. Finally the credit balloon that's been inflated since the earlier 70's which has driven asset prices.

Possibly we are heading into a 40 year period where the combination of factors is totally different, in fact of the reverse of those that preceeded it.