[Estimated time to read: 2 mins]
“The foresight saga” was a thought-provoking article published in The Economist in 1999.
It revealed how the imaginary ‘Ms Foresight’, investor extraordinaire, became a multi-quintillionaire with a net worth 110 million times that of Bill Gates.
All this from an initial investment of $1 in 1900.
She played the perfect investment game and sprinkled on some compound interest fairy dust.
Ms Foresight also shirked the principles of diversification.
Instead, she miraculously invested her burgeoning wealth in the best asset class AND in the best global market every single year.
In 1993, for instance, she invested in Polish shares, achieving 750% dollar returns.
In 1931, when practically every other investor was experiencing their greatest losses ever, Ms Foresight maintained her value by investing in American treasury bonds.
Of course, she suffered at the hands of the taxman which, as sure as her inevitable death, ate into her many quintillions reducing her wealth to “only 1.3 quintillion”.
So, what lessons can we take from this century of investing?
- Death and taxes are unavoidable;
- Equity markets have offered the highest risks AND the highest returns, far outstripping asset classes such as property (even without the leverage);
- Precious metals underperformed against other asset classes with high volatility and low comparative returns;
- Betting on the worst performing asset in any given year NOT sinking further worked for much of the century, but not all; and
- In essence, there is no strategy that can outsmart the markets (other than being Ms Foresight herself).
…Or is there?
Enter passive investing.
This strategy was not mentioned in The Economist of 1999, but has seen great leaps in popularity recently.
Because all passive investments (or index funds) aim to do is track the performance of a specific index in order to deliver the same return as that index, less fees.
And nothing else.
And based on over 100 years of data, the only certainty is that the whole market value has increased.
Let’s look more recently for the evidence.
*MSCI The World Free Total Return 31/12/10 - 31/12/15
**MSCI World Total Return 31/12/85 - 31/12/15
If you can gain exposure to a broad enough spectrum of securities, across the total spread of asset classes, and in every global market according to their relative size each year… then you should be able to keep pace with growth in the markets overall.
Which is as close to a sure thing as it gets.
This is what underpins our approach at AES International.
Your starting point is to understand your current position and decide what you can afford to invest. And then to get started as soon as possible.
To find out what questions you need to ask when choosing a bona fide (real) financial adviser, download our FREE checklist.
Let us meet in the comments. What lessons have you learned from investing?