Broccoli and Chocolate
Over the years the odd book has contained information or ideas that have changed my life. And John Naisbitt's "Megatrends" back in 1982 is definitely up there with the best of them.
You may not remember what the UK economic situation was then but it wasn't clever. Mortgage rates were 15%, UK inflation 20%, experts predicted the Middle East was heading to Communism following the assassination of President Sadat in Egypt the previous year, and stockmarkets had gone nowhere for 16 years.
Naisbitt predicted a massive change from the Industrial Society to the Information Society, with falling interest rates, increased opportunities for entrepreneurs, and buoyant stockmarkets. He also predicted, as information exploded in its availability, paradoxically we'd become increasingly starved of knowledge and commonsense.
In 1990 he co-authored "Megatrends 2000" when he reviewed his 1982 predictions, and looked forward the next 10 years. He saw more of the same, predicted globalisation, even better stockmarket performances and an explosion in easy to use technology.
I write this following the recent Egyptian crisis and having found a copy of an article I wrote in June 1990 about pessimism and optimism. In that article I referred to Naisbitt and the bad news around at the time. Incidentally the mortgage rate then was still 15%, inflation 10%, and experts were predicting wage inflation, higher mortgages, falling stockmarkets, and failing businesses. (And they worry about inflation today at 4%?)
So was June 1990 a good time to invest? Well it depends on your diet as investors - do you stick to Broccoli for the long haul, or do you go for the quick fix Chocolate offers, especially when you're depressed.
The difference between Broccoli and Chocolate came to my notice again this week following an email from a client who had funds switched free of charge into a cautious income one with a sound record. He considers it unacceptable that in the last couple of months the unit price has fallen. Sounds like a Chocolate fix to me.
Actually the unit price has fallen 0.44% in the last month, but it's still up 6% in six months, 12% in twelve, and 44% over the last five years. And that's pretty good considering what we've been through. When I wrote the article in June 1990 the FT Index stood at 2371. Five weeks later it fell 6.4%, and before the end of September, a further 10%. I wonder how Chocolate addicts reacted short term.
Incidentally by the end of 1999, the FT Index closed at 6930, up 192% in 9½ years, in a decade pessimists had written off.
Have you heard of the Dalbar Investors' Study in the US? The last time I looked the study found that while the S&P 500 Index had returned 8.35% per annum over 20 years to the end of 2008, the average equity investor earned only 1.87%, which was less than the average inflation rate. And that's what survey after survey shows. There's a large gap between the returns investors actually earn, and the return they could have earned by simply sticking to Broccoli.
Investors who act like the Dalbar study members I suppose must believe every bit of bad news that gets thrown their way - only investing in funds after a great performance for years. Their poor returns is mostly down to emotion, buying funds or selling them at the worst times.
If you look at the last 20 years, the FT All Share Index is up 185%, the Total Return is up 475%, which demonstrates the value of the Broccoli approach, keep the funds and roll up reinvested Dividends.
Always remember - a good fund manager will outperform an Index. A long term favourite of ours, Neil Woodford at Invesco Perpetual High Income, over 20 years for Broccoli investors has returned, after charges 1191% - more than double the Index.
Okay I don't have to tell you that markets are slightly jittery at the moment, especially Emerging Markets because of the recent experience of Egypt, coupled with higher oil prices and food prices, and so-called higher inflation, but this too will pass.
I guess you won't be surprised to learn we believe our clients should sit tight and stick to the Broccoli diet. Chocolate might make you feel a bit better as a quick fix, but as a long term plan it's a disaster.
This letter is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.