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Danby Bloch: The link between investment risk and timescale

TaxBriefs editorial director Danby Bloch looks at how extending the timescale for an investment affects its performance

My late mother never really got the hang of percentages; I had to work out the 10 per cent tip in restaurants. And I have a sneaky feeling that a great many investors have difficulty with numbers, percentages up and down, yields and growth – let alone volatility. But pictures and diagrams worked well for my mother and are often enlightening for lots of clients too.

So a couple of pages in the Taxbriefs Professional Adviser’s Factfile would have spoken volumes to her. Two pages from the investment section of the Factfile are reproduced below. They compare the returns from a portfolio of UK equities with the returns from cash deposits over five and 10-year periods going back to 1960 as a bar chart.

The ultimate source of the figures is the Barclays Capital Equity Study – a highly respected annual publication that should be required reading for all financial advisers. Not shown here but included in the Factfile itself are more pages giving the precise annual figures for both asset classes as well as gilts in both nominal and real terms.

The Factfile also presents the information as line-graphs to show long term trends, as well as showing returns from equities excluding reinvested dividends.

The bar charts show nominal (not inflation adjusted) returns. The Barclays figures for cash deposits show the returns from building society ordinary accounts up to 1985. Between 1986 and 1997, the figures reflect the returns from the Halifax Liquid Gold Account; thereafter the basis for the returns is an investment in the Nationwide InvestDirect Account.

The equity returns are based on a basket of leading shares selected by Barclays Capital. The FTSE 100 was invented far too late for this kind of ancient history. In both cases gross income is reinvested.
The performance figures provide a reasonable proxy for these asset classes, but it is important to understand their limitations:

  • Management or dealing expenses are not included.
  • There is the issue of tax. In the early days the returns from equities are exaggerated in today’s terms by the assumption that the tax credit on the dividends could be reclaimed. Otherwise no allowance is made for tax on either the equity dividends or the deposit interest. 
  • Then there is the time of year when the performance has been measured – the end of the calendar year. Picking another point in the calendar each year – say 30 June – might well have led to somewhat different conclusions.
  • The figures make no allowance for inflation – which overstates the real returns from both asset classes – especially in periods when prices were rising fast, such as in the 1970s. In a fair number of periods, there would have been a real loss on cash even though it might have performed better than shares.
  • Finally, the income is reinvested. All the returns from cash come from interest and roughly half the returns from equities are based on reinvested gross dividends. These are charts for investors who are in the accumulation phase of their financial lives.

All of which goes to show that past performance needs to be treated with great care.

So how do these charts help people understand investment risk and what are the lessons one can draw from them?

A very important lesson is the link between timescale and investment risk. The longer the investment holding period, the more chance there has been of equities outperforming cash.

But another key conclusion is that even over a 10-year period, there is no certainty of equities performing well.

There have been 53 five-year periods ending in the era between December 1960 and December 2012. In 14 of these periods cash deposits have outperformed shares.

There have been the same number of 10-year periods since 1960, but cash outperformed shares in just five of them.

These periods of outperformance were bunched in the 1970s and then again in the last 10 years.

So if an investor can afford to hold onto their investments and then reinvest their income, equities look generally more attractive. But it could be a rocky road and the ability to ride out a storm will depend on both a steady nerve (risk tolerance) and the financial resilience to be able to postpone drawing on investment capital and income (risk capacity). Storms can sometimes last a decade or even longer, as my mother, who lived through two world wars, knew well.

The statistics in this article are taken from the February update of theProfessional Adviser’s Factfile, the essential sales aid for busy financial advisers. A single source compendium of key facts and figures, Factfile supplies monthly updates, targeted statistics and concise explanations of core concepts so that you can focus on providing quality advice. Readers of Money Marketing who are new subscribers can order the Professional Adviser’s Factfile for a 10 per cent discount using promo code ARTM. Simply call 020 7970 4142 or visit



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