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What Sort of Investment Journey Would You Like?

It is human nature that we would really like our investments to provide a nice solid return with no negative return periods. Unfortunately, that is just a dream. But how can we turn dreams into reality? Reality is achieved when you arrive at your desired destination, preferably with higher levels of income and assets than you needed to reach your investment goals.

No investment journey except for a very short one can be smooth in real terms. Bank deposits can provide a smooth return for a number of years, but the real return will vary depending on the rate of inflation and any tax changes along the way. Bonds bought at say a 4% return, will provide a 4% return to maturity, however there is the potential of a default, in which case all or some of the capital amount may be lost.

People who bought investment properties will have experienced dramatically different returns depending on when and where they bought. Growth returns, for example, in parts of Auckland have been high, but their income returns on a current market price basis have been low. In other parts of the country it may be quite different with solid regular rental returns and perhaps a decline in property value in some very low demand areas.

When it comes to a fully diversified portfolio the results experienced by investors can also be quite different. Lower risk profile investors, unless they were invested in finance companies, mortgage funds and CDO based funds, had a much easier time of it going through the global financial crisis (GFC) than investors who had high exposures to shares at the start of the GFC. However, investors who made significant share purchases at the peak of the GFC, would probably have experienced a great return provided you were invested in the right sort of companies and had an appropriate foreign currency hedging strategy in place.

Let’s look at the sort of investment journey for someone with $250,000 to invest for ten years. They are fifty percent invested in growth assets. The base case is the forecast return. That is only one of the potential investment outcomes. For over ninety-five percent of the outcomes, the return is likely to be between the optimistic and pessimistic return lines.

What is the difference between the two graphical illustrations? The only real difference is one illustrates volatility along the journey. The optimistic line is also higher when the volatility is shown.

So while most of us would like a nice smooth investment journey, in practice it will most likely be more akin to the graph which illustrates the potential volatility along the way. Where there is a steep positive slope, volatility is working for you. Unfortunately, there can be periods where there are negative returns, and it is during those times that there can be a lot of adverse media focus. From a long term investment perspective these negative periods can provide great investment opportunities.


Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.