Do you remember 2013? It sounds quite recent, but then when you think about the major events that happened that year, they seem so long ago. That was the year that Nelson Mandela died at the age of 95, two homemade bombs ripped through the crowd of fans and runners at the Boston Marathon finish line, killing three and wounding nearly 300 others and Typhoon Haiyan killed over 6,000 people in the Philippines and south east Asia. It was also the year the word "selfie" became mainstream!

2013 was also the year that if you had invested money in the MSCI World Index at the end of June, 10 years later on 30th June 2023 you would have enjoyed annualised returns of 10.09% p.a., even with the fluctuations over the last few years. Even more telling is that interest rates were at 0% for much of this period, resulting in deposits being a very poor alternative in comparison.

So if you had the chance to step back in time in your financial life, what might you have done differently? The value in doing this is that while of course past performance is not a guide to future performance, there are always lessons to be learned. Here are 3 lessons that we think you can take away from the last decade.

A long term perspective usually pays off

When it comes to investing, enough time, patience and the power of compound interest are powerful forces. Even though this 10 year period saw an approx. 30% fall when Covid hit and another big sell-off as a result of the war in Ukraine, investors have been well rewarded, particularly with money in the bank not increasing in value.

Being invested in global markets for sufficient time and staying in the markets has rewarded investors over most 10 year periods.  The last 10 years are a great example of this. Time in the market is key, as opposed to trying to time the markets. Investors who stayed the course over the last decade and didn’t panic when markets fell, were well paid for their perseverance – remember that 10.09% p.a. growth figure...

So having a long term perspective and letting markets get to work for you are valuable lessons.

Continuous saving is important too

As we said above, investors who had money invested 10 years ago have done very well, However people who continued to save over the decade did even better. By continuing to save, you are actively growing your wealth yourself as opposed to just relying on the markets. These additional savings also enjoyed the growth over the last decade. Even when markets fell during this time, the regular saver was buying assets at these points in time, at effectively reduced prices. Who doesn’t like buying things at a “Sale” price?

Money is an enabler to help you live a fuller life

We are firm believers that the scorecard is not about how much money you have, it’s about what this money does for you. And we think the last decade has given us more lessons in this vein than most periods before that. Indeed, the "Covid years" taught us lessons that hopefully will stand to us for the rest of our lives.

The pandemic taught us all so much about the importance of health, the value of having access to an emergency fund for unforeseen events and having a financial plan that is resilient in the face of the most unexpected events. Covid taught us that a pandemic doesn’t select people based on means. It also taught us the importance of living the best life that we can, while we are able to do so. Seeing the suffering of the population of Ukraine in the last year just highlights this further.   

Don’t just focus on having more money and risk being the richest person in the graveyard. See money as a means to helping you to live the best life possible and make that your target.

I wonder what valuable lessons we’ll learn over the next decade?

When we’re designing an investment portfolio for our clients, we take into account quite a number of considerations. We start by understanding your investment goals and time horizons, and then we build a full understanding of your liquidity requirements, any asset class preferences that you might have and also the returns that you expect.

This final element brings the whole area of risk into the discussion – what your appetite is for risk and also your capacity to withstand any shocks within your portfolio. We look to build a portfolio for you that, in an overall sense, reflects this appetite and capacity for risk. We want you to achieve your investment objectives, while at the same time ensuring you can get a good night’s sleep and not lie awake worrying about your investments. We're firm believers that if you have an effective, risk-appropriate portfolio in place with a long term perspective, you can then filter out the noise caused by short term events, such as the recent volatility in markets.  

We’re asked a lot about risk in an overall sense and also more specifically about the different types of risk and how they might impact your portfolio. So we thought it would be useful to set out some of the main risks that can have an impact on an investment portfolio.

However we want to start with a note of caution. This is not an exhaustive list; it is simply a list of the main risks. Please note that the magnitude and impact of risks change all of the time too, as investment conditions change. Of course we’re always happy to answer any specific questions that you have in relation to any of these risks.

Economic Risk

This is certainly one of the most recognised risks. When there is a major economic shift, this can have quite a significant impact on investment portfolios. The last time we saw one of these was in 2008 / 2009 when the near-collapse of the banking industry plunged the world into recession, having a significant impact on investment portfolios around the world.

Geopolitical Risk

These are politically led events that happen across the world that create risks, which sometimes don't play out as expected. For example when President Trump was elected, many commentators thought that this would herald a swift decline in investment portfolios. However the opposite turned out to be the case – the S&P 500 index was up 21% in the year after he was elected! But sometimes markets move more as expected - there was a 30% fall in markets (followed by a sharp recovery) after the Covid-19 pandemic hit and we also saw a 20% fall in markets in the year after Russia started the war in Ukraine. 

Market Risk

This is where individual shares can be dragged down as a result of a significant market downturn in their sector, as opposed to issues that may be affecting the individual company itself. Probably better known as collateral damage!

Currency Risk

This risk is impacted by changes within a single country or region. The value of a currency will be impacted by economic events that are specific to that country (along with other factors). So while the investment performance of (let’s say) British stocks that you hold may perform in line with expectations, the value of Sterling will have an impact on your investment too, either increasing or reducing the value when transferring the money back into Euros.  

Interest Rate Risks

We all became very accustomed to an extremely low interest rate environment over the last decade, but nothing lasts forever. We have seen rates increasing sharply as central banks fight inflation and how this impacts different asset classes. For example, as interest rates rise, the yield on existing bonds falls, as investors will get a higher return from new bonds issued. Fixed interest (bond) fund managers in particular watch interest rates like a hawk. In the same vein, inflation risk is another that is carefully monitored by fixed interest fund managers in particular, but is of interest to every single person today!

Credit Risk

Bonds are effectively loans made by investors to issuers (governments or companies usually) in return for a coupon each year and repayment of the loan (investment) at the end of the term. There is always a risk, sometimes very small and at other times bigger that the issuer will default on the repayment of the loan. Higher risk issuers have to pay a higher coupon (rate of return) to attract money to make this risk attractive to an investor.

As stated earlier, this is not an exhaustive list of risks. We all face risks every day in relation to every aspect of our lives, managing investments is no different. However the critical lesson is to be clear about your appetite and capacity for risk, and to ensure that your portfolio reflects this. Then you can leave the fund management experts to worry about all of these individual risks, as they seek to achieve the returns you expect in order to meet your investment goals and objectives.