WEBVTT - How Amateur Investors Can Maximize Their Returns

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, Radio News.

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<v Speaker 2>Welcome to Merrin Talks Your Money, the personal finance edition

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<v Speaker 2>of Marin Talks Money. In these bonus podcasts, we talk

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<v Speaker 2>about the best strategies for making the most of your money.

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<v Speaker 1>I'm Marry Sunset Web and with Me Senior.

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<v Speaker 2>Have brought her and Money Distilled author John Depek Hi

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<v Speaker 2>John Hi meil.

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<v Speaker 1>So this week we are answering a question from Sarah.

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<v Speaker 2>Sarah wrote in, So we haven't got the audio for that,

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<v Speaker 2>so I'm going to have to read the question.

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<v Speaker 1>Sorry about that, she wrote.

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<v Speaker 2>In, and she says, I'm a reasonably savvy investor and

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<v Speaker 2>I'm monitor my investments closely, although investing is not my

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<v Speaker 2>day job, given that I'm smaller, nippy unlike the funds.

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<v Speaker 2>How realistic is it set myself a twenty percent per

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<v Speaker 2>annum growth target from a mix of thirty percent growth shares,

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<v Speaker 2>thirty percent trackers, and thirty percent actively managed funds. Okay,

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<v Speaker 2>this is an interesting question, but our answers to this,

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<v Speaker 2>I just want to be clear before we get going,

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<v Speaker 2>John and I are not going anybody specific advice here,

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<v Speaker 2>but we're just trying to do We're going to try

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<v Speaker 2>and talk around this subject a little bit and give

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<v Speaker 2>a general idea of how to approach this question, this dilemma.

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<v Speaker 2>But the first thing to say, and I think we

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<v Speaker 2>are going to put a number on it, John one

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<v Speaker 2>to ten, ten being realistic, one being not very realistic.

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<v Speaker 2>How realistic is for anybody, not just Sarah, but anybody

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<v Speaker 2>to make twenty percent a year on their investments year in,

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<v Speaker 2>year out.

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<v Speaker 3>I'm afraid it's a wine. Okay, So it's highly highly unlikely.

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<v Speaker 2>Well, there's almost nobody who has ever done this, right

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<v Speaker 2>in our experience. You might get people who, over time

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<v Speaker 2>might come out with a really impressive return, but even

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<v Speaker 2>with ups and downs, twenty percent a year is fairly spectacular.

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<v Speaker 2>But to do that every year for a series of years,

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<v Speaker 2>I mean, who's done that?

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<v Speaker 1>Who is there?

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<v Speaker 3>Well, there are a few people who've mineaged to meet

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<v Speaker 3>I mean Stan Druckin Miller, who's like one of the

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<v Speaker 3>world's most respected hedge fund managers, consistently mine to make

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<v Speaker 3>apparently thirty percent a year between nineteen eighty six and

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<v Speaker 3>twenty ten.

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<v Speaker 2>Kyle but Lynch, But wait, wait, so without without ever

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<v Speaker 2>having a down yet, because that's okay, without ever having

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<v Speaker 2>a year when he had a draw down a twenty

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<v Speaker 2>thirty forty fifty percent consistently.

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<v Speaker 3>Yeah, I mean he was. He's staggeringly good. And there's

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<v Speaker 3>also Fidelities Magellan Found, which was run by Peter Lynch

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<v Speaker 3>who wrote One Up on Wall Street, which is an

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<v Speaker 3>excellent book that you should all read, and he made

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<v Speaker 3>twenty nine percent a year between nineteen seventy seven and

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<v Speaker 3>nineteen ninety so it's it can be done. But they

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<v Speaker 3>are also the world's best investors him and actually it

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<v Speaker 3>was their day job as well, so they're not you know,

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<v Speaker 3>they're not part time investors.

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<v Speaker 2>The other thing that should be said here is there

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<v Speaker 2>an argument to be made that if you keep tossing coins,

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<v Speaker 2>there's always going to be someone who gets twenty years

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<v Speaker 2>worth of heads, right, well.

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<v Speaker 3>Yeah, this is it. I mean yeah, I mean this

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<v Speaker 3>all goes into, you know, the whole argument about active

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<v Speaker 3>fund managers and somebody's got to win the lottery, even

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<v Speaker 3>though the odds are winning the lottery are extremely low

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<v Speaker 3>for any one person. So yeah, just because you win

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<v Speaker 3>the lottery doesn't mean that your skill. That just means

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<v Speaker 3>that you happen to be the one in a million

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<v Speaker 3>people that did it, so again, Yeah, it's very difficult

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<v Speaker 3>to separate out the low I would say that we

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<v Speaker 3>believe in active management having the potential to add alpha,

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<v Speaker 3>as it were. There is also a very good argument

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<v Speaker 3>to be made about you know, monkey's tossing coins and

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<v Speaker 3>one of them getting lots of heads in a row.

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<v Speaker 1>Yeah, what about that wonderful Warren Buffett.

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<v Speaker 3>Was I was doing in this because I mean, yeah,

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<v Speaker 3>if you're looking at things a little bit closer to

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<v Speaker 3>the modern day, and also the sorts of funds that

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<v Speaker 3>pop into your head instantly if you look back over

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<v Speaker 3>the last decade roughly, and I'm taking this in pound terms,

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<v Speaker 3>so you've actually also enjoyed a certain amount of currency

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<v Speaker 3>benefits here as well, because the pound is largely good

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<v Speaker 3>weaker against the dollar. Over the last ten years, Scottish

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<v Speaker 3>Mortgage Trust, which is one that I think most of

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<v Speaker 3>our readers would imagine, has been an absolute stellar performer

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<v Speaker 3>that's done about sixteen percent a year over the last decades.

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<v Speaker 3>Perks of Hathaway's managed about sixteen and a half percent,

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<v Speaker 3>and to be fair, the IS and P five hundred

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<v Speaker 3>has done sixteen percent as well over that period. So

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<v Speaker 3>and that those are those are amazing returns by comparison

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<v Speaker 3>to you know, the kind of long term return on equities.

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<v Speaker 3>So I think the kind of point there is, even

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<v Speaker 3>if you'd been invested in what I think most people

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<v Speaker 3>would think we're very good investments over the last ten years,

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<v Speaker 3>you still wouldn't have managed to hit the twenty percent

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<v Speaker 3>of a year.

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<v Speaker 2>Yeah, and those are also very good investments in a

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<v Speaker 2>period when my marckets have mostly gone up, and particularly

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<v Speaker 2>when American markets have mostly gone up, so they've had

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<v Speaker 2>a fantastic tail wind at the same time.

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<v Speaker 3>Yeah, I mean, so it's been a very good time

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<v Speaker 3>for those, well I suppose. I mean, one using we

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<v Speaker 3>picked them is because they have been among the better

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<v Speaker 3>perform investments. So and also obviously if you'd stuck all

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<v Speaker 3>your money in any of those that had been highly concentrated,

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<v Speaker 3>you know, putting one hundred percent of your money into

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<v Speaker 3>even Warren Buffet's fund, you know, is taking a big

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<v Speaker 3>sort of non diversification risk. So basically twenty percent is really, really,

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<v Speaker 3>really hard, and it's the sort of thing that only

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<v Speaker 3>the world's best investors. They're probably taking risks that your

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<v Speaker 3>average private investor cannot or should not over you know,

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<v Speaker 3>a prolong period of time and using an awful lot

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<v Speaker 3>of expertise.

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<v Speaker 2>Okay, So John, what is a realistic expect for Sarah?

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<v Speaker 3>I mean the long term reton or in equities editatingly,

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<v Speaker 3>I don't have it in front of me, but it's there,

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<v Speaker 3>about seven and eight percent.

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<v Speaker 1>Studying that high.

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<v Speaker 2>I thought it was more like six percent. If you

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<v Speaker 2>look at all the very long term studies for the US,

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<v Speaker 2>you're talking about six percent raere, aren't you sorry?

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<v Speaker 3>Six percent real? I think I'm thanking the nominal terms.

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<v Speaker 2>Yeah, so once once you've adjusted for inflation about about

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<v Speaker 2>six percent.

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<v Speaker 1>Although I have to tell you I.

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<v Speaker 2>Was speaking of build inning at Waverturn and he was

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<v Speaker 2>pointing out to me that the beginning of two thousand

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<v Speaker 2>and nine, the UK stock market, adjusted for inflation, that's

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<v Speaker 2>the key bit, stood no higher than it was in

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<v Speaker 2>sixteen ninety three. It was also lower the marit finished

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<v Speaker 2>every year between seventeen sixteen and seventeen fifty nine, and

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<v Speaker 2>below its level every year from eighteen ninety three to

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<v Speaker 2>nineteen thirteen. So that's not really ideal, is it. That's

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<v Speaker 2>not the kind of returns were after.

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<v Speaker 3>That's bad. But the same thing the UK Kana is

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<v Speaker 3>known as an income market, and I do think that.

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<v Speaker 3>I mean, like the DAKS the gym and DAX is

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<v Speaker 3>a good example here. You know, it's recently made new records.

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<v Speaker 3>But what most people don't fully appreciate is that the

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<v Speaker 3>DAKS is a total return index, so it includes the

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<v Speaker 3>income from dividends in it. And if the foots one

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<v Speaker 3>hundred is of total return index, it would look very different.

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<v Speaker 3>I do feel excluding your I get why people do it,

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<v Speaker 3>but I also don't see that it's of that much

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<v Speaker 3>use if you're looking at long term returns to calculator.

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<v Speaker 2>Like that mega John steppeck Oh is available to defend

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<v Speaker 2>the UK. Thanks John, that's it, are you right?

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<v Speaker 1>Of course?

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<v Speaker 3>I think that there's a slightly there's another issue here

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<v Speaker 3>the way that say that's thinking about this. So she's

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<v Speaker 3>looking at wanting to make twenty percent growth a year,

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<v Speaker 3>and then another part of her questions, she sort of

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<v Speaker 3>com makes a comment that implies that she wants to

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<v Speaker 3>make twenty percent every year in each kind of discrete year,

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<v Speaker 3>and I think that that shows that she's thinking to

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<v Speaker 3>short term, like why why does it need to be

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<v Speaker 3>twenty percent a year?

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<v Speaker 1>So she can double that money in three years, John, Well.

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<v Speaker 3>Yeah, no, and that would be great. I'd love to

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<v Speaker 3>do that too. But it's more I think you need

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<v Speaker 3>to start from the perspective like, well, what is my

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<v Speaker 3>end goal? What is a realistic return that an average

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<v Speaker 3>person would make? And then if I mine to beat that,

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<v Speaker 3>that's great, But what's the average return? And then how

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<v Speaker 3>much do I need to be saving it this end

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<v Speaker 3>to make sure that I have the best chance of

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<v Speaker 3>meeting my goal. I think in the way she sort

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<v Speaker 3>it feels as if she's looking at this backwards, it's

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<v Speaker 3>like she's kind of started with, well, twenty percent would

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<v Speaker 3>be a nice number, and perhaps hasn't truly thought through, well, actually,

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<v Speaker 3>what is my end goal and what am I doing

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<v Speaker 3>this for?

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<v Speaker 1>Yeah?

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<v Speaker 2>Yeah, okay, And we know that she's most likely to

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<v Speaker 2>fail to hit this goal, which means that she might

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<v Speaker 2>start making the wrong decisions. I'm not getting it with

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<v Speaker 2>this mix of both earlier, So I'm going to change

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<v Speaker 2>this portfolio quickly because I might get up with this

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<v Speaker 2>other kind of portfolio. I'm not getting in with that

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<v Speaker 2>kind of portfolio, So maybe I'll change and try this

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<v Speaker 2>kind of portfolio, which, as we know, is the is

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<v Speaker 2>the root to ruin really, because you end up racking

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<v Speaker 2>up transaction fees and taking far too much risk along

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<v Speaker 2>the way.

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<v Speaker 3>It's easy to panic if you have the wrong target.

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<v Speaker 2>Yeah, And the other thing that we should talk about,

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<v Speaker 2>I think, and you said this is that if we're

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<v Speaker 2>talking about growth shares, trackers and actively manage funds, what

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<v Speaker 2>are we actually talking about. That's not really an accid allocation,

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<v Speaker 2>that is a style allocation.

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<v Speaker 3>Well yeah, and it's not even a style allocation because

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<v Speaker 3>you're like, well, the trackers at this point in time

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<v Speaker 3>almost certainly all are basically growth funds because you know,

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<v Speaker 3>the S and P five hundred is run by or

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<v Speaker 3>setting up until very very very recently has been run

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<v Speaker 3>by growth stocks all the rest of them, so basically,

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<v Speaker 3>and then the active funds will what type of active

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<v Speaker 3>funds are you looking at? And that's before you get

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<v Speaker 3>to things like your country allocation and your more more importantly,

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<v Speaker 3>your asset allocation. So have you get any money in bonds,

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<v Speaker 3>you get any money in gold, that sort of thing.

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<v Speaker 3>So there's a lot of questions about diversification and exactly

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<v Speaker 3>have you properly thought through where your money is because

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<v Speaker 3>it sounds to me, like with that mex it would

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<v Speaker 3>be extremely top heavy growth at the moment and bottom

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<v Speaker 3>heavy everything else.

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<v Speaker 2>Well, I mean it would be because I mean, let's

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<v Speaker 2>say that growth shares means what the Mega seven track means,

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<v Speaker 2>A very large percentage is in the Mega seven or

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<v Speaker 2>at least in US tech stocks and in particular in

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<v Speaker 2>the US and thirty percent actively managed funds. Now, that

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<v Speaker 2>could mean anything at all. But it's also true that

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<v Speaker 2>most actively managed funds these days will have a relatively

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<v Speaker 2>high allocation to those same momentum driven technology stocks, because

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<v Speaker 2>without it you will almost definitely underform, perhaps not going forward,

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<v Speaker 2>but historically you would definitely have one performed. If you

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<v Speaker 2>didn't tell this doc said, if you hold those two

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<v Speaker 2>things and you don't think about it.

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<v Speaker 1>Very carefully, you are effectively in momental investor. Yeah, which

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<v Speaker 1>is probably not what you want to be over the

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<v Speaker 1>long term.

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<v Speaker 3>Yeah No, because you again, you need to diversify by

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<v Speaker 3>style as well. And I think this is the other issue,

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<v Speaker 3>isn't it. I mean, obviously depending on how active you

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<v Speaker 3>want to be, But you can't predict the future, so

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<v Speaker 3>you probably want to have exposure to more than one strategy.

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<v Speaker 3>You don't want all your eggs in one basket. And

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<v Speaker 3>the only other thing that we can usually say with

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<v Speaker 3>a moderate degree of confidence is that if you buy

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<v Speaker 3>stuff when it's cheaper, then you've got a better chance

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<v Speaker 3>of getting a better return than if you buy it

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<v Speaker 3>when it's expensive. I recognize that that has not entirely

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<v Speaker 3>been the you know, like betting on the expensive stuff

0:11:57.559 --> 0:11:59.000
<v Speaker 3>has been a good bet for quite a while and

0:11:59.080 --> 0:12:03.040
<v Speaker 3>play for longer than I'm normal, But that doesn't mean

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<v Speaker 3>that you know, they can rules of investing, if you like,

0:12:06.400 --> 0:12:12.120
<v Speaker 3>have been can retracted all our time. If you buy

0:12:12.160 --> 0:12:14.640
<v Speaker 3>stuff that is cheap, then you should do better than

0:12:14.679 --> 0:12:15.920
<v Speaker 3>buying stuff that's expensive.

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<v Speaker 1>Yeah. I think that's always our message, isn't it. So

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<v Speaker 1>there you go.

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<v Speaker 2>Lots of things to think about, Sarah, But the key

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<v Speaker 2>point there is that I'm afraid twenty percent is unrealistic.

0:12:25.400 --> 0:12:27.880
<v Speaker 2>In fact, it's very unrealistic, and maybe we need to

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<v Speaker 2>go back to the drawing board with this one.

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<v Speaker 1>Think about what it is.

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<v Speaker 4>That you really want, how long you have to reach

0:12:32.880 --> 0:12:36.200
<v Speaker 4>the goal, and start thinking about it from the grand up,

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<v Speaker 4>and also, in particular, think about asset allocation a little

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<v Speaker 4>bit more carefully.

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<v Speaker 2>And I think that's X for this week on that question.

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<v Speaker 1>But just to be clear again, we are not giving advice.

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<v Speaker 1>We are giving things to think about, which is different.

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<v Speaker 1>Thank you for listening to this week's Mary Talks Money.

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<v Speaker 2>If you like us, share, rate, review, and subscribe wherever

0:12:53.280 --> 0:12:55.280
<v Speaker 2>you listen to podcasts, and be sure to follow me

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<v Speaker 2>and John on X or Twitter at marins w and

0:12:58.720 --> 0:13:02.400
<v Speaker 2>at John Underscore. This episode was produced by some Asadi

0:13:02.480 --> 0:13:05.760
<v Speaker 2>Production Importance. Sound designed by Blake Naples. Questioning comments on

0:13:05.800 --> 0:13:08.560
<v Speaker 2>this show and all our shows are always welcome. Our

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<v Speaker 2>show email is merin Money at Bloomberg dot ne