Following last week’s FE Adviser Fund Index article on investment timeframes, it is worth digging further into the performance of the three benchmark portfolios over three and five years.
One surprising statistic is that despite the difficult market conditions between March 2007 and 2009, the ratio of negative to positive weeks does not seem to change overwhelmingly between the different timeframes. Looking at the aggressive index, for example, the negative to positive ratio over five years is roughly 4 to 5, while over three years it is closer to 2 to 3.
This means that over the past five years there would have been an average of 23 weeks of negative performance and 29 weeks of positive performance. This compares to 21 negative and 31 positive weeks a year, on average, over the past three years.
Despite the relatively similar ratios, the performance outcomes are radically different. The aggressive index returned only 18.13 per cent over five years, whereas it returned 59.44 per cent over the past three years.
This demonstrates the high degree of market volatility the portfolios have endured in recent years. The difference in performance can be attributed to the fact that during the negative weeks between March 2007 and March 2009, the portfolios fell considerably more than during negative weeks in the following three years.
It also shows the picture is not as clear cut as investors would hope. There were 52 weeks of positive performance over those same two years of heavy falls, suggesting there was still money to be made for the active investor.
Unfortunately, the financial crisis meant performance of the three AFI portfolios differed more on upside than the downside. In the two years to March 19, 2009, the aggressive, balanced and cautious indices fell by 25.91 per cent, 24.46 per cent and 22.25 per cent respectively. However, in the three years from that date they have rallied by 59.44 per cent, 50.35 per cent and 42.71 per cent. This illustrates once again the importance not only of headline performance figures but how these numbers were achieved.
Rowan Dartington head of collectives research Tim Cockerill says: “Invariably, investors would not have bought into the market at or even near its lowest point. But hindsight colours things and it is that dynamic that allows people to focus on the three-year numbers.”
The old debate about investor time horizons remains as pertinent as ever. The returns of the past three years are unlikely to be repeated, while risks to the global recovery have also been growing. Advisers tempted to push stories of stellar short-term returns should tread carefully. Managing expectations during bull markets is just as important in retaining clients as protecting their capital when markets turn. Nothing erodes trust quicker than a promise unfulfilled.
Data supplied by FE