Investing is often confused with gambling, and it’s easy to see why. The NEWS (Negative Events World Service), are obsessed with reporting on the latest shock to the economy or financial markets. Yet they go remarkably quiet when events and markets are more buoyant. The only sane definition of ‘money’ is ‘purchasing power’.
Asset Classes
Broadly speaking there are 4 principal asset classes
- Cash – a means of exchange for goods and services in the short term
- Property – Illiquid, physical real estate that can be rented out for an income
- Bonds – Loans to governments, and the great companies of the world
- Equities – Shareholdings in the great companies of the world
N.B. Cryptocurrency, fine wine, watches, artwork etc. are speculative items.
Volatility and return are highly correlated – as much as we’d all like it to, low volatility and high return simply doesn’t exist.
The below table shows, over the past 10 years, the growth of various asset classes. The rational, disciplined, investing literate who held these assets through good and bad times would’ve experienced the following results:
| Asset Class | Initial Investment | 10 Year Return |
| Cash (measured as compounded BoE base rate) | £100,000 | £108,070 |
| Inflation (measured as CPI) | £100,000 | £132,620 |
| South-West Property Index | £100,000 | £164,770 |
| Greenfields Balanced | £100,000 | £183,630 |
| Greenfields Adventurous | £100,000 | £250,440 |
N.B. All data take from FE Analytics to 9.9.23
Inflation is the silent killer that eats away at the purchasing power of your capital. Cash is not the ‘safe’ place we think it is.
Volatility or Risk?
[When most people think of risk, the thought that springs to mind is ‘permanent loss of capital’. It is critical to not confuse this with volatility, which is an inherent feature of investing, rather than a ‘bug’ in the system. The last few years in capital markets have been amongst the most volatile in history. That said, as can be seen from the table, over a 10 year period, an ‘Adventurous’ investor saw a total compounded return of 150%, in spite of all the temporary declines! In over one century of stock market data, every decline has been temporary, and the advance permanent. Human behaviour is the single largest cause of investment losses.]
Evidence-Based Investing
[A low-cost, globally diversified portfolio of assets with a tilt in favour of securities which have historically exhibited (and achieved) higher expected returns is our favoured approach at Greenfields. Let’s change the mindset that a financial advisor is able to time the markets, and pick the best performing (expensive) fund managers on a forward looking basis – I regret they cannot.
All investing carries risk, and past performance is absolutely no guarantee of future performance. But as the above table reminds us, not investing and remaining in ‘safe’ cash assets carries a far greater risk to our lifetime consumption.
It’s critical that your advisor takes their own medicine and invests with the same investment philosophy as they preach for their clients. This is known as ‘skin in the game’. The next time you meet with yours, check that they’re using the same strategies for their own financial future as they’re recommending for yours – their answer may surprise you….
Read more on our approach to investing here: https://greenfields.biz/services/savings-and-investments/