The chief lesson from last week’s Bearbull is that the investment returns from just a very few years will play an outsized role in shaping a portfolio’s performance over its lifetime; and the returns from two or three investments among the scores made will have the same effect. These facts of life can’t be evaded and will apply both to a gem of an investment portfolio and to the worst also-ran; when the final tally is made, both will be seen to have depended hugely on the happenstance of a few decisions.
Given this unpalatable truth, readers may want to stand back and ask if they want to accept these odds. Metaphorically, would they want to take the risk of being in the equity market in a year such as 1973 (when UK equities crashed by 58 per cent) just so they can be sure of participating in 1974 (when they bounced by 120 per cent). As to imagining they would be smart enough to sidestep the 1973 equivalent while ensuring they are fully invested in 1974, dream on. Oh, and let’s remember that if they were in for all of 1973 and 1974, then they would still be 8 per cent down on where they finished 1972 – that’s just arithmetic.
Really, this is a matter of asking, what sort of an investor does someone with capital want to be. The choice lies along a spectrum ranging from the most timid saver to the most gung-ho investor. The distinction between ‘saver’ and ‘investor’ implies a passivity or a lack of it; the reluctance or the willingness to accept the risk – ie, the volatility – that rises the further investors move away from those products that pretty well guarantee the return of principal – at least in nominal terms – and towards those that don’t and, at the far point of the risky end, don’t even offer interest payments to be going on with.