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A Pound for Your Thoughts

The £1 coin was introduced on 23 April 1983. If you’d invested one of them in the FTSE All Share, the main UK stock market index, by now you’d have seen a whopping 3,000 per cent return on your investment, an average of a little under 11 per cent each year.

But were better returns available? Perhaps an international fund would have done better? Analysis of the MSCI World Index shows roughly the same returns; around 2,800 per cent over the same period, an average of almost 10.5 per cent per year.

Ten-thousand pounds 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 those returns have been improved still further?

Size Matters

Diversification is generally considered the most important single thing you can do with your investment portfolio. It takes many forms; company size is one of them.

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 – if you focus on the smaller listed businesses.

The UK small cap index on average returned over 12.8 per cent annually since 1983, and the global small cap index also did very well at over 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 global small cap over £495,000.

Diversity is King

These comparisons highlight why diversification matters. All four indices mentioned 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: for the FTSE All Share, the worst 12-month return was minus 34.3 per cent (to October 2008), and the best was plus 62.6 per cent (to September 1987) – huge swings.

What lessons can investors take from this? Markets rise and markets fall, ‘twas ever thus. Investors are rewarded for their length of time in the markets and the wise ones buckle up and sit 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 today is, so diversify your portfolio and accept the amount of investment risk you are comfortable with.

 
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