The lost decade: have investors made money?

Gemma Godfrey Gemma Godfrey: there is an investing "sweet spot"

Over the past 10 years, investors have experienced a stark divergence of fortunes, with some making substantial amounts of money whilst others have suffered losses.

Timing, picking the right investments and employing the right strategy have determined their fate.

When investing, timing can be crucial. You make money if you buy something when it is cheap and sell it when it is perceived to be more valuable. If you buy the same object when its price is high, making a profit will be that much harder.

In the run up to the year 2000, investors bought shares in technology companies to such an extent that values predicted firms would make unrealistic profits. This 'bubble' burst and the stock market fell. September 2001, the start of our 10 year period, lies within this period of selling. Therefore, together with the fall from the financial crisis in 2008, losses were enough to offset the substantial gains achieved in the seven years between these events.

Investing in the 'sweet spot'

An initial investment of £100 in the FTSE 100 (the index of the 100 largest companies listed in the UK), would have fallen in value by 4%, returning only £96 all these years later.

This return hides a huge divergence of fortunes. Firstly, when choosing the size of the firm in which to invest, there appears to have been a 'sweet spot' for medium-sized firms in the FTSE 250 (the next 250 companies after the largest 100 listed on the London Stock Exchange) - small enough to grow substantially, but large enough to have weathered the storms.

Secondly, the sector. The shares of companies selling basic materials almost tripled in value over the past decade, in contrast to those of financial firms, which lost half the initial investment. The belief driving these moves was that certain materials (for example copper and iron) have become harder to mine and produce, making their producers more valuable. In contrast, banks have suffered from loan defaults, bankruptcies and increased regulation, which have all hurt profits.

Thirdly, the geographic focus. Whilst investing in UK, US or European companies on the whole produced meagre returns or losses, investing in the developing markets of China, Russia or Brazil generated astounding returns; Brazil stands out with a gain of 578%.

Investment returns of different markets Basic Materials outpaced the FTSE 250, while the FTSE 100 did better than financial shares
Reinvesting is key

Short-term investment decisions have had as much of an impact as choosing where to place money for the longer term.

During our investment timeline, many companies regularly paid a portion of their profits to shareholders, so-called dividends. How an investor used this payment strongly dictated how much money they made.

If it was re-invested back into the stock market it continued to generate returns, if it was put into their bank account it did far less.

Returns when re-investing The MSCI World Equity index - boosted by reinvesting returns, lagging when taking out the money
Wealth of opportunity

There are other assets an investor could have bought apart from shares, some of which performed far better and greatly enhanced the amount of money made over this period.

Lending to governments or companies in developing countries proved highly profitable, with relatively large interest payments made to the lender (i.e. the investor) until the loan was repaid.

Another interesting investment was property, which in general provided investors with highly attractive returns over the past decade, even after the sharp correction during the recent recession.

Finally, hedge funds, like investors, have had a mixture of fortunes. With focus on different markets, some have made staggering returns whilst others are still nursing losses.

Interestingly, it has not been worthwhile to bet on a falling market. Money managers lost money if they focused solely on making a profit when certain investments fell in value.

Unsurprisingly, fund managers with investments in emerging markets (like Brazil, Russia and China) almost tripled their initial investments.

When investing, during the past decade it paid to be particular.

Emerging markets returns Brazil was the top performer; hedge fund investments in emerging markets were runner up; government bonds did well; the S&P Global Property index provided returns; UK stocks were lagging

Gemma Godfrey is a quantum physicist, former hedge fund manager and now chairman of the investment committee of wealth management firm Credo Capital.

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