Almost every good piece of financial advice urges investors to focus on the long term. It encourages them to not be swayed by day-to-day market movements, or even what happens from year to year.
Clichés like ‘stay the course’ and ‘it’s time in the market that counts, not timing the market’ are repeated so frequently that their message is taken for granted. And yet just the fact that they have to be brought up so often suggests that the message isn’t hitting home.
Many investors cannot help being swayed by what they see happening to their account balances, whether they are reading investment statements every quarter, or looking at their portfolios every day. It is human nature to worry when we see any kind of loss. Just as it is human nature to want to do something about it.
This is what leads to chasing performance and switching investments, which is almost inevitably counterproductive. Investors tend to lock in losses by selling low, and to pick new investments based on recent past-performance, thus buying high. Ultimately, this is wealth destructive.
It also over complicates what it takes to be a successful investor. Essentially, it’s a simple exercise: select good, diversified investments at the start, and stick with them. The chances of reaching your goals by following this approach are far higher than constantly trying to pick the next short-term out performer.
To do this takes discipline, but it becomes a lot easier when investors appreciate what it truly means to take a long term view.
1. Take a long term view of markets
The South African stock market has been a miserable place for investors to be over the past five years. Without dividends, growth has been almost zero.
Even with dividends reinvested, the rolling five-year return to the end of 2018 was lower than cash. In other words, investors could have had their money sitting risk-free in a bank deposit, avoided the angst caused by the likes of Steinhoff, Group Five and Resilient, and earned a better return.
However, this doesn’t happen often. As the graph below shows, it last occurred 20 years ago, and then 20 years before that.
Stock markets are not consistent, and periods of significant out performance come and go. That is, however, exactly why they are an asset class that delivers long-term returns.
Investors get rewarded for that risk with higher returns. However, that also means that you can’t get those higher returns without taking the risk. Investors who understand that and make peace with it from the start will be more likely to enjoy success.
2. Take a long term view of performance
Over the last 12 months, the performance of multi-asset high equity funds has been poor. The majority have delivered returns between 3% and 6%.
Even over five years, the average return from balanced funds has been just 5.7%. Investors looking at those numbers could justifiably feel unsatisfied.
However, this ignores that the five years before that produced exceptional returns in the bull market that followed the 2008 global financial crisis. The average return from funds in the multi-asset high equity category over 10 years is therefore a much healthier 10.7%.
With inflation in South Africa having moderated substantially in recent years, that is just below 5% above inflation. This is in line with long term averages.
Of course not everyone has been invested that long, but you don’t need to have actually seen that return to take comfort from it.
3. Take a long term view of your investments
Investors tend to fixate on a single figure: the monetary value of their portfolios. However, this doesn’t take into account where that figure comes from.
Whether you are investing in stocks, exchange-traded funds, or unit trusts, there is a corresponding number of shares or units from which the monetary value is calculated. And if you are constantly adding to your portfolio, you are buying more of those shares or units every month and that figure will continue to climb, whether prices go up or down.
In fact, when the prices of the shares or units fall, you will be able to buy more of them for the same amount of money.
This is important because those shares or units have a present value, but they also have a future value. The monetary figure attached to them today is only illustrative of what they are worth if you sold them now.
If you’re investing for the long term, however, you don’t need to sell them now. Your intention is to hold onto them and hopefully only sell them much later. Their future value is therefore far more important than the current price.
If you take a long term view of markets and a long term view of performance, those shares and units must be worth far, far more in 10 or 20 or 30 years’ time. To realize that value, however, you have to be prepared to show resilience until then.