Following the recent excitement of the new £1 coin, I wondered how much I would have now if I had invested 10,000 of them when the coin was first launched.
The £1 coin was introduced on 23 April 1983, a year when Baroness Thatcher was Prime Minister and seat belts became mandatory for drivers and front-seat passengers.
Since that day, the FTSE All Share, the main UK stock market index, has returned a whopping 3,000 per cent on investment, averaging a little less than 11 per cent each year.
Considering this period covered the “dot-com bubble” in 2000 and the financial crisis from 2007-08, it’s been a rollercoaster of a ride for most investors but one that ultimately delivered a good return.
But would that have provided me with the best return? Perhaps an international fund would have done better? Analysis of the MSCI World Index shows roughly the same returns, hitting 2,800 per cent over the same period, an average of almost 10.5 per cent per year.
My £10,000 invested in the FTSE All Share in May 1983 would be worth over £322,000 today while the MSCI World Index equivalent would be worth a little over £292,000.
Both very impressive, but could I have improved my returns still further?
Diversification is considered the most important single thing you can do with your investment portfolio. It takes many forms: company size is one option that merits attention. The relative size of the companies in which you invest has a considerable effect on your portfolio’s performance.
How much of an effect? Historically, a substantial one. The UK small cap index (focused on companies with a valuation above £150m but below the FTSE 250) on average has returned 12.8 per cent annually since 1983, and the international small cap index also did very well at 12.1 per cent per year average return.
Although the journey was rockier than the main indices, the same £10,000 investment in the UK small cap index when the £1 coin launched would be worth over £604,000 today and the international small cap over £495,000.
Diversity is king
These comparisons highlight the benefits of diversification because all four of the indices mentioned above arrived at their destination via different paths. Despite their much lower performance, at
times on the journey the main indices would have offered more favourable returns.
Consider this: although the average return for the FTSE All Share was 11 per cent, the worst single 12-month return was nearly minus 34 per cent (to February 2009) and the best was plus 62.6 per cent (to February 2010) – huge swings.
Investors are rewarded for their participation in the markets and the wise investor buckles up and sits tight.
We don’t know what the markets hold for us in the next 34 years or where the best place to hold 10,000 of the new £1 pound coins is, so diversify your portfolio and accept the amount of investment risk you are comfortable with.
– Warren Shute CFP is a chartered wealth manager and the founder of lexo.co.uk