20 per cent VAT 2012 budget 50% return accountancy accountancy fees accountancy services accountant accountant B accountants accounting for dividends accounting records accounting software accounts accounts software administration annuity annuity rates Autumn statement avoid inheritance tax avoidance of tax avoiding inheritance tax bank lending basic personal allowance BCC big picture book keeping Bribery Act British Chamber of Commerce BS7858 budget budget 2011 Budget 2012 budgeting business business accounts online business advice business cash management business confidence business continuity business continuity management business continuity plans business cost management business efficiency business exit business exit planning business finance business friendly business funding business goals business growth business investment business loan business management business owners business performance business plan business planning business record keeping business records business sale business success business succession planning business survival business tax planning business tips bwe based account cash flow Cash flow forecast cash is king cash management Cash-based accounting cashflow chancellor chartered accountant chartered accountant Birmingham chartered accountants chartered financial planner chartered financial planner Birmin child savings children’s savings choosing an accountant client entertaining Cloud accounting Company Tax returns compliance industry contractors IR35 corporartion tax Corporation tax credit control credit control procedure cyber attack cyber crime cyber insurance cyber security cyber threats data security data security. IT security debt collection debt recovery despite some of the bad press over recent years director’s loan account directors loan directors pensions Directors’ loan account dividends doubl Dragon’s Den dragons den Economic expansion EIS email security employee data security Enterprise Investment Scheme enterprise zones entrepreneur Entrepreneur’s relief entrepreneurs entrepreneurs relief ethical hacker Everyone needs to finance their retirement and exit planning finance finance management financial advisor financial difficulty financial forecasts financial freedom financial goals Financial management financial plan financial planner financial planning financial planning checklist financial planning tips financial wellbeing FSTE 100 FTSE100 fund manager gifts global markets growth growth finance HMRC HMRC enquiries HMRC enquiry HMRC IR35 guidance HMRC tax enquiries HMRC tax enquiry home loans how to manage time ICAEW IHT income tax income tax r income tax relief income tax return independent financial advisor information security information security management inheritance tax inheritance tax planning insolvency Institute of Chartered Accountants investing Investment investment advice investment diversity investment in marketing investment management investment options investment philosophy investment planning investment portfolio investment risk investment strategies investment volatility investments investors IR35 ISO 27001 ISO 27001 benchmark ISO 27001 consultants ISO22301 ISO27001 IT security Jimmy Carr jobs keeping the books key perfirmance indicators key performance indicators KPIs kpi's late payment penalties late payment penalty fines late payments legal tax strategy management information management meetings management standards managing data security marketing investment miscalculated tax motivating staff national lottery new years resolution online accountancy online accountancy software online accounting on-line accounting online accounting software online accounts online tax return online VAT return outsourced accountancy outsourcing outsourcing accounts overtrading owner managers Parker Management Consultants partnership agreements passwords Pay off mortgage PAYE paying a dividend Payroll penetration testing pension pension contribution pension contributions pension fund Pension funds pension investment pension investment strategy pension scheme pensions pensions forecast per personal allowance trap Personal financial plan personal financial planning personal guarantees personal pension personal pensions personal tax return plumbers tax safe plan pre pack administration private pension profitable business sale R & D tax credits R&D tax credits recession red tape reduce tax remote working report on economy research and development tax credits retirement retirement planning risk risk return safest passwords Saga sareholder protection cover security of websites Seed Enterprise Investment Scheme SEIS selecting an accountant Self assessment self assessment tax return self invested personal pension selling my business selling your company shareholder agreements shareholder protection SIPP SIPPS small business small business owners small business tax small businesses small firms SME SME business management SME marketing SME tax planning SMEs social media policy SSAS start up start-up stock market succession planning tax accountant tax affairs tax avoidance tax breaks tax charges tax code tax disclosure tax enquiries tax enquiry tax evasion tax investigation tax investigations tax liability tax man tax mitigation strategies Tax planning tax planning advice tax planning schemes tax reduction tax reform tax relief Tax return tax saving tax saving strategies tax savings tax strategies Tax tribunals taxation tax-break time management time management skills top rate of tax tough times UK Bribery Act UK economy VAT increase vat return VAT rise VAT submission web based acc website security when to pay a dividend work-life balance Xero Xero accountancy software Xero accountants xero accounting xero accounts Xero accounts service

Investment diversity today is all about the global economy

Add to: Digg Add to: Del.icio.us Add to: Facebook Add to: Furl Add to: Google Add to: Live Spaces Add to: MySpace Add to: StumbleUpon Add to: Twitter
Thursday July 7, 2011 at 9:00am

Gone are the days when an investment in the FTSE all share index would provide a reliably, healthy rate of return. For the last 11 years the FTSE all share index has returned only 2.4% per annum.

The investment winners today are those who focus on keeping costs low whilst also investing in a broader, globally diversified portfolio. One such globally diversified portfolio when back tested returned 7.4% per annum for each of the past 11 years. Compare this with the FTSE 100 which has actually lost money over the same time period.

How was such a return achieved you may ask. Well the answer is by keeping costs as low as possible and by holding equities in the same weighting as global stock market weightings. There is a lot of science behind such a portfolio but the point is that the market owes investors a return (around 8% historically) for the risk they take by investing in company shares rather than AAA rated Gilts. The problem is that most investors do not capture that return.

Most people talk about the FTSE 100 as if it was the stock market but the above clearly shows that it bears no resemblance to the global stock market in terms of performance. By holding your investments in the same weighting as world markets you are getting the best diversification possible.

Markets represent the sum total of all investors estimates of individual company values at any point in time. Hence all known events are reflected in the price of the market. So the only things that can move markets are the unexpected events. This is why stock market returns are volatile over the short term but surprisingly consistent over the long term.

To put the unexpected into context I looked at where the market uncertainty is coming from right now. Generally accepted wisdom is that over the past decade the UK economy has been skewed towards consumer expenditure with the consequential increase in consumer debt to over 100% of UK GDP at one stage, higher than US consumer debt. The warning signs were there but we only see them with the benefit of hindsight.

Accepted practice a few years ago, such as 125% mortgages, buy to let property deposits funded by credit cards, banks like HBOS competing in the property market with high risk loans at very low interest rates etc, appear reckless in the current environment. But very few saw the banking crisis coming until it had actually arrived. Hence it was an unexpected event as evidenced by the 2008 stock market correction.

We now find ourselves in what most are calling a financial and banking crisis with the accepted wisdom that recovery from such a situation takes much longer than recovery from the more normal economic recession. However, UK manufacturing in the 1970’s was around 22% of the economy, it fell to 9% but is now back up to 12% so a 33% improvement on the low. Manufacturing has fallen in Europe too, (Germany was 35% now down to 21%). The latest UK figures showed 450,000 jobs created in the past year (despite 140,000 public sector job losses). Who would have thought it, so much despondency but the figures, again unexpectedly tell a happier story.

Another story from the US tells of some 41 million US citizens collecting food stamps and over 50% of families accepting some form of federal or state support, who knows where the US is headed next, chances are whatever happens it will be unexpected. Then you have booming Australia, well their currency is booming anyway, which has made their exports expensive to the rest of the world, thus damaging the country’s wine industry. 25% of the country’s exports go to China and a further 27% go to countries like Japan and South Korea who are in turn dependent upon China. Unlike investors, countries find it difficult to diversify but if China sneezes South East Asia will probably catch a cold. If it happens this will move stock markets which means the market couldn’t anticipate it.

The rule is to have as much diversification as possible in your investments because what moves markets is the unexpected. And the more diversification you hold the less you are at risk from the effects of the unexpected.

Andy Parker
Chartered Accountant and Chartered Financial Planner

Comments on this post:

There aren't any comments for this post yet. Why not be the first to comment?

Share your experiences:

Your Name  
(to appear with your comment)
Email Address  
(will not be published)
Human Validation Check  
In the box below, please type the characters that you see in the picture. This helps us to ensure a real person (and not a crafty computer!) is submitting this form.

Enter the code shown to the left:

Parker Chartered Accountants and Financial Advisors is the trading name for PLW Advisors Ltd (Registered No. 10396831), and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here