Earlier this month, Eliud Kipchoge from Kenya became the first person in recorded history to run a 42km marathon in less than two hours. The 34-year-old long-distance runner clocked in at 1:59:40.2 at the INEOS Challenge in Vienna, Austria.
Albeit, Kipchoge’s amazing talent, it was als
o a feat of reserves and resolve built up by years of discipline and working the program. Creating wealth is not much different. Investing requires consistency, perspective and patience. It’s a marathon, not a sprint.
Competing since 2003, the former track Olympic medalist only switched to road running in 2012. And like any other superior athlete who suffers through injury and sacrifices lifestyle luxuries, his performance steadily improved over the years, and not only reached, but broke through the goalpost.
Similarly, for investors to reach their financial goals, they should stick it out when times are tough, but also maintain their (financial) fitness when markets bounce back.
Local equities and listed properties’ returns have been as flat as the Free State, and active asset management has failed the local investment community over the last five years, and their portfolios are the poorer for it. Retirement funds aren’t allowed to make up much of the difference anywhere else either, as regulations restrict the movement of money, and the making thereof.
But markets all over the world have been all over the place, with the US and China entangled in a trade tiff, the continued Brexit drama and global economies slowing down. Politicians are unpredictable, economic futures are uncertain and in South Africa talks around prescribed assets and expropriation of land without compensation, have investors nerves on edge.
Irrational markets make for irrational investors, and it is not uncommon for people to make hasty decisions in panic or while attempting profit chasing.
But as the famous Warren Buffett quote goes: “Remember that the stock market is a manic depressive.”
“Equity markets swing wildly from day to day, on the smallest of news rally, and crash on sentiment, and celebrate or vilify the inanest data points. It’s important not to get caught up in the madness but stick to your homework,” he has been quoted in the media.
Buffett has also been quoted saying “We’ve made a lot of money in stocks over time, but there’s been years when we’ve lost money, too.”
Buffett’s “buy and hold” strategy is one he has reiterated time and time again. Both Wells Fargo and Coca-Cola stocks have been held by Berkshire Hathaway for at least three decades, as an example.
Any financial advisor worth his salt will tell you longevity should always be a major consideration in a financial plan.
But still, South African investors continue to switch frequently among top-performing funds, against advice and despite much evidence that chasing top performers just doesn’t work.
Morningstar recently conducted research into the area of investor returns comparing a portfolio where investors switch into the best performing fund from the previous year at the start of a new year (i.e. the “Performance Chaser” portfolio), and compared it to the returns achieved by investors that remained invested in their respective portfolios over the same time frame.
The returns earned on these hypothetical portfolios were compared to two portfolios of unit trust funds managed by Morningstar – one low equity portfolio and one high equity portfolio.
Morningstar’s low-equity portfolio returned 6.3% more than the low-equity Performance Chaser portfolio over a period of four years. In other words, an investor with an investment of R1m who picked the Morningstar portfolio and remained invested for the entire period would have earned an extra R63 095 in returns.
The difference is even more pronounced in the high-equity portfolio. In this case, the Morningstar Adventurous portfolio returned 13.93% more than the high-equity Performance Chaser portfolio over four years. An investor with an investment of R1m who picked the Morningstar portfolio and remained invested would have earned an extra R139 269 in returns.
It highlights the benefits of staying invested as a robust and consistent strategy as opposed to backtracking and chasing yesterday’s winners. A well-diversified portfolio that is designed to meet your investment goals while remaining within your risk tolerance is much more likely to result in long-term investment success than trying to buy yesterday’s winners.
The same can be said about trying to time the market. I worked on the SA equity market using the Capped SWIX spliced with the ALSI data over the last 20 years of daily returns.
The returns are annualised using daily data. I looked at the cumulative best 2, 5, 10 and 30 days.
The below graph explains what would have happened if an investor missed the best x number of days over the last 20 years. You can see the returns are reduced the more the best days are missed.
The returns may seem marginal, but these are annualised returns. So, if you missed the best 30 days, you have given up almost 2% of returns per annum compounded. That will be 50% of returns over the 20 years.
To put it in another way, investing R100 at 16.38% per annum at day 1, you would have returned an amount of R2 077.62 which is 20.7 times your initial capital. At 14.58%, your capital would be R1 521.17 which is 15.21 times your initial capital.
Please note that I used 5 680 days of returns to do these calculations where I then annualised it using 365 days.
As per the previous narrative, when analysing the S&P500 index, we see a similar trend, with a marginal decrease in performances if you’ve missed the best days in the market. These marginal differences are annualised differences which when compounded display a rather huge loss.
Just looking at the S&P 500 in rand terms, the difference between all trading days and missing the best 30 days is 2.82% per annum. Translate that cumulatively over 20 years and the investor loses out on another 74.36% of returns.
As economist Javier Estrada wrote after studying more than 160 000 daily returns from 15 international stock markets: “Much like going to Vegas, market timing may be an entertaining pastime, but not a good way to make money.” It makes a lot more sense to make your investment decisions based on your needs and what you need to do to reach your goals and then stick to that plan, even if it can sometimes feel uncomfortable.
The global investment universe is vast and can best be navigated with the guidance of an experienced, accredited financial advisor who can devise a strategy suited to an individual’s investment goals and risk profile. Details of the Brenthurst offering here: Brenthurst Wealth Investment Planning