Next month I will be 63 years old, and I have a bone to pick with my late parents.

Instead of giving me a Post Office savings book (opened at the Mastrick branch in Aberdeen where we lived at the time), why didn’t they invest everything they owned in a UK smaller companies fund?  

If they’d had the foresight to put £1000 into the bottom 10% of companies in the UK equity market by value, I would now have 490,370 reasons to thank them. That’s what an annualised return of 10% looks like if you keep compounding for six and a bit decades.   

Of course, the problem with the ‘miracle’ of compounding is that it’s a heavily back-end loaded process. That £1000 invested in the year of the Suez crisis, 1956, would have taken until four years into the new millennium to breach the £100,000 level.

I’d have been well past my mid-life crisis at 54 when it broke through £200,000. Then the real miracles start to happen. Just four years later it reaches £300,000, then it takes only another three years to reach £400,000. Next year it would crash through the half million pound barrier and, by the time I reach the end of this decade of my life, it would double again to a million quid.

How does that compare to the default investment of most Brits, residential bricks and mortar? Well, according to the latest research from broker Numis and London Business School, property doesn’t come close. Over that same period, which includes some massive inflation in property prices, the annualised average return has been around 3% after inflation. Good, but a massive opportunity cost compared to smaller companies.

Be honest, if I’d asked you which was a safer long term investment, property or smaller companies, which answer would you have given? Me too. One seems rock solid, the other at the riskiest end of the already volatile stock markets.

The other clear lesson, which it’s good to remind ourselves about on a regular basis, is the power of compounding. The (currently) impossible dream is to know everything we know now, then turn the clock back thirty years or so while retaining that knowledge and experience. Just think what smart decisions we could have made in the 1970s and 1980s!  Starting sooner would have ensured that even average returns could have added an order of magnitude to our net worth today.

Until some combination of AI and robotics makes a reality of Dr Who’s Tardis, we’ll all have to live with the consequences of decisions made by our younger selves. Which means looking for:

  • Ways to accelerate the average returns in our portfolio
  • Ways to minimise losses to the taxman

Both these points will be addressed at our next Boardroom Breakfast on Wednesday 13th February when we talk about the scandalous performance of most ISAs in recent years and suggest a remedy combining performance, tax efficiency and security. Click here to grab one of the 15 remaining seats.  

Until next time

Graham

P.S. This week is the last chance to take part in our 2019 Member Survey and receive a copy of my upcoming new report Wealth 2020 – How To Survive Brexit and Corbyn. Click here to take the survey