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!