How to test your investment adviser

Before it's too late

Mencken. Clear, Simple & Wrong. Paul Claireaux

This Insight will equip you to test your investment adviser about your expected investment returns.

If you think this is useful guidance and you want to help me stop the spread of misleading information from parts of the multi-trillion pound (dollar) investment industry, then please share:-)

Do you always need to stay invested?

Well, at times like this, too many of the organisations selling funds will tend to pump up their message volume with all the reasons YOU need to stay fully invested.

If you’ve not yet seen it, you can read their classic and grossly misleading missing the best days story here

But regardless of the extreme levels reached in market valuations – and the US market is at an extreme level right now – see below – some fund managers and wealth advisers will always tell you that there’s nothing to worry about… and that you simply need to take a medium to long term view.

Sadly, that claim does not tally with the facts … unless your medium-term view is 100 years or so 🙂

If your investment horizon is anywhere between 5 and 15 years ahead … up to your retirement for example – the pictures can be very different.

So, if your adviser is one of those ‘cheerful but dim’ eternal optimists – I strongly recommend that you ask them these questions.

And please do it quickly…

In fact, today would be a good time.

Here are the questions

  1. What should I expect as a return on Stockmarket investments over, say, the next 10 years?
  2. And how do market valuations – at the time of my investment – affect my expected returns?

If your investment adviser doesn’t understand these questions, get a new one… and quickly.

Of those advisers who understand these questions then some will give you a comprehensive answer and hopefully be able to demonstrate how they take extreme market conditions into account.

Others will give you a comment that goes something like this.

‘Long term data tells us that your total expected return on the stock market is somewhere between 5% and 6% p.a. above inflation.

And no, you don’t need to worry about short term market wobbles because markets always bounce back’

Sound familiar?

Yes, but it’s not good enough, and if that’s the sort of ‘palm off’ answer you get, I suggest that you send your adviser this chart – and ask them to explain it.

Shiller CAPE Sept 20. Paul Claireaux

Ask them to explain how:

Over the 10 years from March 1999, the USA stock-market produced not 5% p.a. returns but MINUS 5.1% p.a. 🙁

That was the return on the index in, what’s called, nominal terms.

The annualised loss in real (after inflation) terms was c 7.5% p.a.

Reinvested income would have softened the blow a bit – to around minus 6% p.a.

But then that would have been offset by various charges. 

So, the typical retail fund investor would have been down by about 50% in real terms over 10 years.

I’d also suggest that you ask them how the US stock-market managed to fall by nearly 90% – in around 3 years from the summer of 1929.

Or how it managed to post 3 consecutive full years of massive losses from the end of 1928?

Year 1 – minus 16%

Year 2 – minus 24% and

Year 3 – minus 39 %!

These (post-1928) figures, by the way, are in real (inflation-adjusted) terms – and they take account of reinvested income too.

But I’ve ignored charges which would have made these losses worse.

Figures from the Barclays Equity Gilt study – which looks at investment performance data over more than 100 years.

But what if you’re mostly invested in UK stocks?

Well, ask your adviser how the UK stock-market managed to lose around 50% of its value in real terms over the 10 years from 1964.

And how the, normally, safer portion of a portfolio (Government Bonds, aka Gilts) managed losses of a similar scale over the same period!

10 Bad years for equities and Bonds

If your adviser can’t answer these questions to your satisfaction, you really might want to consider if they’re right for you.

Understanding the red and blue line chart, at the top of this page

Please note – this information is just for you. So, don’t send your adviser this bit, or you’ll ruin the test 😊

The red line in that chart plots a valuable market valuation metric for the US Stockmarket.

Its technical name is the cyclically adjusted PE ratio (CAPE for short) and you can learn more about it here.

The blue line shows the returns on the US Stockmarket (excluding income but before any fund or advice charges) over the subsequent 10 years – starting from the dates shown.

Notice that the blue line runs out in 2010 – because we don’t yet have the data for 10 yrs after that 🙂

(for updates on this and more – sign up for my newsletter at the base of this page) 

Now, I think that any reasonable person can spot a pattern here!

When markets get very pricey 

they tend to produce poor returns 

or losses over the subsequent period.

There’s no way of knowing if this will happen again, or when, of course.

It’s just been the trend in the past.

Big numbers at the end of 1999

If you’re new to investing, you might not recall 1999, but let me tell you, there was a lot of excitement about the new millennium, and stock market valuations had gone haywire.

I think a lot of people were dreaming that we were on the ‘cusp’ of a technological revolution.

A revolution that would make us all 10 times more productive.

Of course, such thinkers didn’t anticipate that millions of people would use the ‘tech’ to spend half their day sharing videos of ‘fluffy kittens’ 😉

But some people, inside the investment industry (other than those whose income depended on selling investment funds), could see the problem, and some of us warned our friends and family to beware of the risks.

How many investment fund salespeople do you think did that?

The problem wasn’t new though – and Upton Sinclair (born in 1878) summed up the issue for us long ago.

Hard to get a man to understand something

We know that some advisers like to tell you about wonderful recent stock market performance – whether it’s over the past year or the last 20 or 30 years.

But please be clear… this is useless information for YOUR decision making from this point in time.

And it’s especially useless given that so much economic growth in the past 40 years has been fuelled by an enormous lending binge – which is unlikely to be repeated from this point in time. Read More on that here.

Don’t get taken in by the ‘missing the best days’ story

Perhaps you’ve not heard it yet, but if you’re an investor – you almost certainly will in the very near future.

That ‘missing the best days’ story is always trotted out at times like this.

So, you need to be prepared for the nonsense when it turns up again which, like a bad penny, it will; read it here.

The chart above is the key Insight you need

It gives you the facts – clear as day – and covers 140 year’s worth of data.

Now that’s a proper long term chart.

What’s more, the data comes from the website of Nobel Prize-winning economist, Professor Robert Shiller which means it’s robust.

You can find out what Professor Shiller was thinking about the 10-year prospects for the US Stockmarket, last year,  here.


Shiller does not claim to ‘know’ what future returns will be. (Unlike the efficient market fanatics who will tell you to expect 5% or 6% p.a on your investments regardless of when you invest.)

But he does offer us an intelligent view, based on the data, and that’s as good as you can hope for in this game.

Now, if you want more ‘intelligent insights’ like this one (rather than market optimistic sales spiel) on the issues that really matter to your long term wealth, just sign up to my newsletters or join my Facebook group using the links below.

I’d love to welcome you aboard.

Thanks for dropping in


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As a thank you, I’ll send you my ‘5 Steps for planning your Financial Freedom’ and the first chapter of my book, ‘Who misleads you about money?’Newsletter Sign up. Paul Claireaux 2020Also, for more frequent ideas – and more interaction – you can join my Facebook group here

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