A year ago I was scrabbling for funds to buy a house, the market was down about 5 points in a month, and Brexit seemed like a tail risk. What a difference a year makes.
My investment portfolio finished 2016 up 24%. A record year. Am I a genius? Was I lucky? Was this normal for stock market investors?
I will wager that most investors, even the sophisticated risk-friendly readers of this blog, returned less than 20% annual gain last year. Feel free to let me know your returns in the comments below as I’d be delighted to hear there are hundreds of similar ‘achievements’ out there but somehow I doubt it (1).
What’s been going on? Well FTSE-100 reached a record high. It’s the red line (‘UKX’) in my graph below. It was in fact up about 14% on the year, plus dividends. So a purely UK equity investor should have been well into double digits.
Bonds had an amazing year too. Despite entering 2016 at ‘unsustainably high levels’, they carried on climbing. At one point in August UK corporate bonds (purple, SLXX) were up 18% in the year. They finished up about 10%. Very few investors would be purely fixed income let alone purely corporate bonds. But a balanced portfolio of, say, 60% equity 40% bonds would have returned about 13%.
If your portfolio returned less than 13% then you have materially underperformed. Which is quite a statement.
Of course as my readers will know I invest much more widely than just the UK. The UK accounts for about 6% of the world’s stock market. The USA is about 50% of it. How has the USA done? Well its bonds (purple, AGG, in the graph below) have not moved in the year, unlike the UK’s (actually they did move *in* the year but they ended up where they started).
The Brexit referendum on June 23rd is very visible on this graph, with sharp jumps in the currency, the UK stock market and UK bonds.
Across the pond, USA equities have had a decent year. They (orange, SPY) finished up about 10%, plus dividends. So a US investor with a 60:40 equity:bonds split would be up about 6% plus dividends – probably about 8.5% in total. This is not too shabby, and is slightly ahead of long term average returns pre inflation. The Trump election result in early November isn’t as visible graphically but has clearly pulled bonds down and reversed the trajectory of US equities.
So, a typical US investor would see just under 10% in 2016, and a typical UK investor would be just over 10%. So my 24% is not looking too bad at all, huh?
The answer of course is the link between the UK and the US. The currency. The dollar gained 20% against the pound (green, USDGBP). So, despite the wilful ignorance of UK economic commentators (especially Brexiteers) to acknowledge it, the UK economy has shrunk this year by 20%. At least when measured in the prevailing global currency everybody (except UK GDP statisticians) uses to measure such things. So any UK investor who has invested in, say, US equities, has had an amazing double whammy – the S&P is up about 10% in dollars, and the dollar is up about 20% against the pound, so in pound terms the S&P is up about 30%.
And in fact there is a single investment which captures what’s been going on for UK investors very clearly. VWRL, Vanguard’s World Equities ETF, is a London-listed ETF that tracks world stock markets and is measured in pounds. And, my goodness, look how it’s done (blue, VWRL) – it’s up 27% in the year, plus dividends. So a UK investor who just tracked ‘the world stock market’ would have been up almost 30%.
Against VWRL my 24% isn’t looking quite so good. But of course my portfolio isn’t all stocks. It also remains very overweight UK compared to the world stock market. So my returns are slightly lower than the 30% benchmark.
My discussion above oversimplifies my portfolio, which is overweight Australia and also has a significant ‘International’ (a.k.a. funny-speaking) exposure. All key markets tracked the USA pretty closely – equities up 10%, fixed income flat, and the currency almost 20% up against the pound.
The final angle I should mention is that the big thing I did in January was take out a portfolio loan to gear up my portfolio. For most of the year I’ve had a loan of about 30% of my total portfolio value. This has the effect of amplifying market movements by 100/70, but also imposes an interest cost drag on the return. Overall this year has been an amazing year to be leveraged, as my 24% return demonstrates. But I’m still aiming to reduce my leverage slowly over time.
There won’t be many years like this ever again, thank goodness.
P.s. (1) Lest any Monevator readers or others misunderstand my reasoning for saying I think most readers will be below 20pc on the year, I believe most UK investors I know have a lot of home bias in their portfolio, and are thus much closer to the ftse/uk bonds performance than the VWRL figure. From the comments below there are also clearly several readers who are the exceptions to this rule!
FIRE v London 
Well played sir, definitely worthy of a victory dance.
My own share portfolio achieved comparable results, but the contraction of the inner London property market has given my estimated net worth figure a bit of a kicking. Thankfully paper declines in market value estimates only become real when we sell, and I remain content with my holdings even if the property gods seem to have lost the faith somewhat recently.
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@SlowDad – thanks for your comment.
I’m not even considering the estimated value of my property portfolio. For starters my biggest holding is my Dream Home, which I think of more as a liability than an asset. I have a variety of other illiquid assets too and I basically ignore them all; rather than estimating the paper values I only really pay attention when I realise a gain/loss.
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Similar to yourself -26.98% (vs. VWRL 30.16%).
It does help that I am roughly 50% of the pot in VWRL though!
In spite of being a passive fan, i am concerned about the heights of the USD at the moment.
I am concerned that I feel the VRWL is rather too USD-concentrated. If there were a similar fund (eg VWRL ex USD) then I’d take that, and buy a USD ETF to give me some exposure to the USD.
I suppose I could always short USD, but that is a bit complicated in a simple SIPP
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Good for you. I too am a passive fan but right now my rebalancing signal is to move out of US and into UK. Not sure that feels right given the macro environment. I know I should just get on with it but can’t quite face it.
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Well played sir!
Still waiting for a few dividends to hit the accounts but it looks like I’ll be a little over 17% total return for the year. I currently have a Med home purchase sitting in cash which is acting as a boat anchor on performance but even netting that off I’d be nowhere near 24%
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I am at 30.6%. At home, I had zero allocation to the FTSE and was mainly in long-dated gilts. This returned 20% in 2016, but I took some profit at 30%+ in Sep. The big returns were driven by the slump in GBP/USD. My biggest allocation, to a macro hedge fund, delivered +20% in USD and almost +40% in GBP terms. Some stunning returns from Brazilian and Russian local govt bonds (+90% and +65% in GBP terms) also helped, albeit these were smaller positions (private banks do have some uses occasionally). Some US banks stocks I own also went up 60% in GBP terms, mostly after the Trump win.
The drags were being 15% in cash (big error …) and my P2P/bridge loan portfolio which returned only 10-12%. Overall though, I’m surprised my absolute return portfolio, which is heavy on fixed income, and only 20% in equities, could keep up with something like VWRL.
Medium-term, though, I see the GBP/USD uplift to returns as totally illusory. Yes, some of my assets have PVed up almost 20% due to this but that’s meaningless unless I also PV my forward liabilities. As a 40 something who pays for many services and goods which are priced in USD, Brexit may cost me more than these upfront gains in the long term. Measured in USD terms, the year looks rather less satisfactory.
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Congrats. Keeping up with VWRL without a roughly similar exposure is particularly impressive.
I meant to lay out my returns in USD terms. I agree with you regarding some of this year’s win being illusory as our cost of living etc will claw back gains. But even in USD terms my returns are OK (>5%); considering my UK exposure this is quite a good result.
Unfortunately local govt bonds in Brazil and Russia are well beyond my competence. Glad to hear those private bank fees are earning a return…
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EM fixed income is my area of (in)competance but there was a huge EM buy signal for the any investor on March 7 when Ambrose Evans-Pritchard wrote a piece in the Torygraph called “Downfall of Brazil’s Lula marks end of Brics fantasy”. When a know-nothing journalist starts waxing about Brazil defaulting you know it must be a buy since there is nobody else left to sell. One great quote was “Brazil is the first of the Brics quintet to break down on so many fronts at once, but Russia and South Africa are both in deep crisis”. YTD index returns in GBP on Brazil, Russian and South African bonds in 2016 were 84%, 64% and 56%, respectively!
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Hi FvL,
Sorry, I thought I had already commented on this but I obviously missed it, apologies!
A great result from the slow and steady working well, and good to keep to your target allocations – I can’t blame you to want to reduce your leverage though!
I just posted my results – not at all bad for me…>40% for the financial year although I normally go for tax year.
I definitely need to move to a more passive investment, I know this, yet I am struggling!
Cheers, and good luck for 2017!
FiL
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30% on my passive equity portfolio for 2016, on an unchanged asset allocation that’s primarily world equities with no home bias. Dialed down to 25% once you factor in the fixed income. No secrets, it’s a boosted result of investing SIPP+ISA just before brexit.
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