The first is a suggestion that we should always discuss an investment’s performance net of inflation. In theory this makes perfect sense – a key point of investing is to generate returns that outstrip inflation, rather than losing future spending power by sticking with cash. And in a low-inflation world, this principle has been easily forgotten, as if because inflation has been so low we can simply ignore it. In the short term this is loosely true – £1,000 today will buy pretty much the same a year from now. But as Toby Ross of the Saints investment trust pointed out at our event, even low inflation rates compounded over many years can do major damage to the real value of investment portfolios, just as charges do – a point our reader also makes. The problem we all face is that few – if any – investment houses present their funds’ performance adjusted for inflation, or measured against inflation-adjusted benchmarks. We shall investigate a solution.
The second suggestion is that we should “tell the whole story” especially when discussing investment companies that “have raised their dividends every year since the Flood, but usually without discussion at the same time of other factors which are relevant, such as the size of the increases, their consistency, cover or revenue reserve”. Several such ‘dividend heroes’ were mentioned at our event, and they are unsurprisingly popular because the structure of investment trusts means they can keep income flowing even in bad times and investors value the apparent consistency of income that these heroes offer. Yet, as we recently explored in our funds section (‘How to pick a robust UK equity income trust’, 22 March 2018) we should be looking at more than the label when selecting investments. In both instances the funds industry uses statistics and marketing to present itself in the best possible light. Arguably it would be more useful to investors if it were to present past performance in the worst possible light – if we still like them warts and all, they’re probably a good investment.
Which leads tangentially on to our reader’s final point, and this is the shortcomings of forecasting. Our reader’s point is that many in government and the media present forecast information as though delivered by crystal ball, making no reference to “uncertainty, probability and margins of error”. This crime has been particularly prevalent throughout the Brexit kerfuffle, where forecasts have been selectively bandied about to score political points. But it is also at the heart of the entire investment industry, where we’re always trying to second guess what could happen in the future. The point is that we can never know – and as our reader notes, investors are better served by understanding this limitation.
