There are 11 sectors in the IA universe that have made a negative return for investors over a period of at least 10 years, according to data from FE Analytics.
Investing is supposed to be a long-term activity, and it is recommended you commit your money for a period of at least 10 years if you predominantly hold equities. However, data from FE Analytics shows that even investing your money for this length of time is no guarantee that you won’t end up in negative territory.
Sectors that have lost money over 10 years
Source: FE Analytics
Unsurprisingly, IA Japan tops the list with the longest period of negative returns. The launch of the IA sector coincides almost perfectly with the peak of the Topix index before Japan entered its well-publicised lost decade (or two) as it suffered from deflationary forces. Someone who invested in the sector at launch at the start of 1990 would have still been sitting on losses in May 2014 – a period of 24.4 years.
Performance of sector during longest losing run
Source: FE Analytics
Less predictable perhaps is the sector in second place: IA Technology & Telecommunications. The FAANGs – Facebook, Apple, Amazon, Netflix and Alphabet (Google) – in the US and the BATs – Baidu, Alibaba and Tencent – in China have been responsible for much of the growth in global markets over the past decade and, as a result, IA Technology & Telecommunications is the best-performing IA sector over this time, with gains of 407.31 per cent.
However, it has yet to fully shake off the legacy of the dotcom bubble and someone who invested in the sector in March 2000 would still have been sitting on losses at the end of 2018, almost 19 years later. Despite the spectacular gains of the past decade, it is still up just 21.39 per cent from its peak at the turn of the century.
Performance of sector since 2000 peak
Source: FE Analytics
Industry commentators regularly remind investors about the importance of diversifying their portfolios and may argue that these figures underline the dangers of failing to follow this advice. Many also recommend equity income as a useful tool for cushioning market corrections, as reinvesting the dividends means you will be taking advantage of any falls by automatically buying shares at a much lower price.
However, the sector with the fourth-longest period of negative returns combines both these tenets: IA Global Equity Income was still in negative territory almost 13 years after the bursting of the dotcom bubble.
Performance of sector during longest losing run
Source: FE Analytics
So, do these figures suggest investors should keep at least one eye on market timing? Adrian Lowcock, head of personal investing at Willis Owen, doesn’t think so, pointing out that the 2000s were something of an anomaly. He carried out his own research which showed investors with a diversified portfolio who commit their money over 10-year periods make a positive return 95 per cent of the time.
“The one exception to that in the past 20 years was effectively if you bought at the peak of the dotcom bubble, as your 10 years on was effectively the bottom of the financial crisis,” he adds.
“It is time in the market, not timing the market. But there are always exceptions that prove that rule and one of them was if you were really unlucky, you bought at the top of the dotcom bubble and that was all you did.
“But most investors don’t buy in one go, so they would have got a different experience in real life.”
Investors who diversified by asset class and not just geography would have been relatively well protected even through the 2000s, with most fixed income sectors seeing minimal periods over the past 20 or so years when they were in the red.
This doesn’t mean investors should pile up on bonds now – even though central banks appear reluctant to raise rates much further from here, many experts warn they could be at the start of their own bear market. Last year, AJ Bell’s Kevin Doran predicted they will underperform inflation over the long-term.
However, Lowcock says the figures show the advantage of regularly rebalancing your portfolio and Kerry Nelson, managing director of Nexus IFA, agrees with him.
“In the environment we are in now actually there is no rhyme or reason to what is going on in the world,” she explained. “There are lots of underlying significant issues and any one of those things could tip us into a really bad position.
“It is understanding how to position yourself in a differing environment to make the most of things but also to shelter yourself when you need to. And that does need re-evaluation, that is not a static scenario.
“Investors generally find that out too late because instead of being positioned for the next cycle they generally position themselves a little bit too early or a little bit too late. That’s why I think it is invaluable to have support in some shape or form when you are making investment decisions.”
She adds that the results of the study show why investors shouldn’t get so hung up on trying to beat the market or a sector, but should instead aim for a target that is more suitable for them.
“Those realistic benchmarks are more about inflation, CPI plus, so that is dependent on the risk you are prepared to take,” Nelson continued.
“If I am a low-risk investor, I want to keep up with either RPI or CPI or a combination plus 1 per cent, because by doing that, that is really low risk. I just want to do a little bit better.
“That is a realistic assumption, because that is the real world, that is what you want your money to do. You then have to look at the ingredients to help you deliver that and that is a challenge all of the time.”