Bloomberg Audio Studios, Podcasts, Radio News.
Welcome to Merrin Talks Your Money, the personal finance edition of Marin Talks Money. In these bonus podcasts, we talk about the best strategies for making the most of your money.
I'm Marry Sunset Web and with Me Senior.
Have brought her and Money Distilled author John Depek Hi John Hi meil.
So this week we are answering a question from Sarah.
Sarah wrote in, So we haven't got the audio for that, so I'm going to have to read the question.
Sorry about that, she wrote.
In, and she says, I'm a reasonably savvy investor and I'm monitor my investments closely, although investing is not my day job, given that I'm smaller, nippy unlike the funds. How realistic is it set myself a twenty percent per annum growth target from a mix of thirty percent growth shares,
thirty percent trackers, and thirty percent actively managed funds. Okay, this is an interesting question, but our answers to this, I just want to be clear before we get going, John and I are not going anybody specific advice here, but we're just trying to do We're going to try and talk around this subject a little bit and give a general idea of how to approach this question, this dilemma.
But the first thing to say, and I think we are going to put a number on it, John one to ten, ten being realistic, one being not very realistic. How realistic is for anybody, not just Sarah, but anybody to make twenty percent a year on their investments year in, year out.
I'm afraid it's a wine. Okay, So it's highly highly unlikely.
Well, there's almost nobody who has ever done this, right in our experience. You might get people who, over time might come out with a really impressive return, but even with ups and downs, twenty percent a year is fairly spectacular. But to do that every year for a series of years, I mean, who's done that?
Who is there?
Well, there are a few people who've mineaged to meet I mean Stan Druckin Miller, who's like one of the world's most respected hedge fund managers, consistently mine to make apparently thirty percent a year between nineteen eighty six and twenty ten.
Kyle but Lynch, But wait, wait, so without without ever having a down yet, because that's okay, without ever having a year when he had a draw down a twenty thirty forty fifty percent consistently.
Yeah, I mean he was. He's staggeringly good. And there's also Fidelities Magellan Found, which was run by Peter Lynch who wrote One Up on Wall Street, which is an excellent book that you should all read, and he made twenty nine percent a year between nineteen seventy seven and nineteen ninety so it's it can be done. But they are also the world's best investors him and actually it was their day job as well, so they're not you know, they're not part time investors.
The other thing that should be said here is there an argument to be made that if you keep tossing coins, there's always going to be someone who gets twenty years worth of heads, right, well.
Yeah, this is it. I mean yeah, I mean this all goes into, you know, the whole argument about active fund managers and somebody's got to win the lottery, even though the odds are winning the lottery are extremely low for any one person. So yeah, just because you win
the lottery doesn't mean that your skill. That just means that you happen to be the one in a million people that did it, so again, Yeah, it's very difficult to separate out the low I would say that we believe in active management having the potential to add alpha, as it were. There is also a very good argument to be made about you know, monkey's tossing coins and one of them getting lots of heads in a row.
Yeah, what about that wonderful Warren Buffett.
Was I was doing in this because I mean, yeah, if you're looking at things a little bit closer to the modern day, and also the sorts of funds that pop into your head instantly if you look back over the last decade roughly, and I'm taking this in pound terms, so you've actually also enjoyed a certain amount of currency benefits here as well, because the pound is largely good
weaker against the dollar. Over the last ten years, Scottish Mortgage Trust, which is one that I think most of our readers would imagine, has been an absolute stellar performer that's done about sixteen percent a year over the last decades. Perks of Hathaway's managed about sixteen and a half percent, and to be fair, the IS and P five hundred
has done sixteen percent as well over that period. So and that those are those are amazing returns by comparison to you know, the kind of long term return on equities. So I think the kind of point there is, even if you'd been invested in what I think most people would think we're very good investments over the last ten years, you still wouldn't have managed to hit the twenty percent of a year.
Yeah, and those are also very good investments in a period when my marckets have mostly gone up, and particularly when American markets have mostly gone up, so they've had a fantastic tail wind at the same time.
Yeah, I mean, so it's been a very good time for those, well I suppose. I mean, one using we picked them is because they have been among the better perform investments. So and also obviously if you'd stuck all your money in any of those that had been highly concentrated, you know, putting one hundred percent of your money into even Warren Buffet's fund, you know, is taking a big
sort of non diversification risk. So basically twenty percent is really, really, really hard, and it's the sort of thing that only the world's best investors. They're probably taking risks that your average private investor cannot or should not over you know, a prolong period of time and using an awful lot of expertise.
Okay, So John, what is a realistic expect for Sarah?
I mean the long term reton or in equities editatingly, I don't have it in front of me, but it's there, about seven and eight percent.
Studying that high.
I thought it was more like six percent. If you look at all the very long term studies for the US, you're talking about six percent raere, aren't you sorry?
Six percent real? I think I'm thanking the nominal terms.
Yeah, so once once you've adjusted for inflation about about six percent.
Although I have to tell you I.
Was speaking of build inning at Waverturn and he was pointing out to me that the beginning of two thousand and nine, the UK stock market, adjusted for inflation, that's the key bit, stood no higher than it was in sixteen ninety three. It was also lower the marit finished every year between seventeen sixteen and seventeen fifty nine, and below its level every year from eighteen ninety three to nineteen thirteen. So that's not really ideal, is it. That's not the kind of returns were after.
That's bad. But the same thing the UK Kana is known as an income market, and I do think that. I mean, like the DAKS the gym and DAX is a good example here. You know, it's recently made new records. But what most people don't fully appreciate is that the DAKS is a total return index, so it includes the income from dividends in it. And if the foots one hundred is of total return index, it would look very different.
I do feel excluding your I get why people do it, but I also don't see that it's of that much use if you're looking at long term returns to calculator.
Like that mega John steppeck Oh is available to defend the UK. Thanks John, that's it, are you right?
Of course?
I think that there's a slightly there's another issue here the way that say that's thinking about this. So she's looking at wanting to make twenty percent growth a year, and then another part of her questions, she sort of com makes a comment that implies that she wants to make twenty percent every year in each kind of discrete year, and I think that that shows that she's thinking to short term, like why why does it need to be twenty percent a year?
So she can double that money in three years, John, Well.
Yeah, no, and that would be great. I'd love to do that too. But it's more I think you need to start from the perspective like, well, what is my end goal? What is a realistic return that an average person would make? And then if I mine to beat that, that's great, But what's the average return? And then how much do I need to be saving it this end to make sure that I have the best chance of
meeting my goal. I think in the way she sort it feels as if she's looking at this backwards, it's like she's kind of started with, well, twenty percent would be a nice number, and perhaps hasn't truly thought through, well, actually, what is my end goal and what am I doing this for?
Yeah?
Yeah, okay, And we know that she's most likely to fail to hit this goal, which means that she might start making the wrong decisions. I'm not getting it with this mix of both earlier, So I'm going to change this portfolio quickly because I might get up with this
other kind of portfolio. I'm not getting in with that kind of portfolio, So maybe I'll change and try this kind of portfolio, which, as we know, is the is the root to ruin really, because you end up racking up transaction fees and taking far too much risk along the way.
It's easy to panic if you have the wrong target.
Yeah, And the other thing that we should talk about, I think, and you said this is that if we're talking about growth shares, trackers and actively manage funds, what are we actually talking about. That's not really an accid allocation, that is a style allocation.
Well yeah, and it's not even a style allocation because you're like, well, the trackers at this point in time almost certainly all are basically growth funds because you know, the S and P five hundred is run by or setting up until very very very recently has been run by growth stocks all the rest of them, so basically, and then the active funds will what type of active funds are you looking at? And that's before you get to things like your country allocation and your more more importantly,
your asset allocation. So have you get any money in bonds, you get any money in gold, that sort of thing. So there's a lot of questions about diversification and exactly have you properly thought through where your money is because it sounds to me, like with that mex it would be extremely top heavy growth at the moment and bottom heavy everything else.
Well, I mean it would be because I mean, let's say that growth shares means what the Mega seven track means, A very large percentage is in the Mega seven or at least in US tech stocks and in particular in the US and thirty percent actively managed funds. Now, that
could mean anything at all. But it's also true that most actively managed funds these days will have a relatively high allocation to those same momentum driven technology stocks, because without it you will almost definitely underform, perhaps not going forward, but historically you would definitely have one performed. If you didn't tell this doc said, if you hold those two things and you don't think about it.
Very carefully, you are effectively in momental investor. Yeah, which is probably not what you want to be over the long term.
Yeah No, because you again, you need to diversify by style as well. And I think this is the other issue, isn't it. I mean, obviously depending on how active you want to be, But you can't predict the future, so you probably want to have exposure to more than one strategy.
You don't want all your eggs in one basket. And the only other thing that we can usually say with a moderate degree of confidence is that if you buy stuff when it's cheaper, then you've got a better chance of getting a better return than if you buy it
when it's expensive. I recognize that that has not entirely been the you know, like betting on the expensive stuff has been a good bet for quite a while and play for longer than I'm normal, But that doesn't mean that you know, they can rules of investing, if you like, have been can retracted all our time. If you buy stuff that is cheap, then you should do better than buying stuff that's expensive.
Yeah. I think that's always our message, isn't it. So there you go.
Lots of things to think about, Sarah, But the key point there is that I'm afraid twenty percent is unrealistic. In fact, it's very unrealistic, and maybe we need to go back to the drawing board with this one.
Think about what it is.
That you really want, how long you have to reach the goal, and start thinking about it from the grand up, and also, in particular, think about asset allocation a little bit more carefully.
And I think that's X for this week on that question.
But just to be clear again, we are not giving advice. We are giving things to think about, which is different. Thank you for listening to this week's Mary Talks Money.
If you like us, share, rate, review, and subscribe wherever you listen to podcasts, and be sure to follow me and John on X or Twitter at marins w and at John Underscore. This episode was produced by some Asadi Production Importance. Sound designed by Blake Naples. Questioning comments on this show and all our shows are always welcome. Our show email is merin Money at Bloomberg dot ne