Investors who ‘time’, miss the recovery and historical points of reference

At a time like this when markets adjust (worst week since 2012) it’s truly a time for rejoicing for all accumulators.  The Standard & Poors is down 17% and the NZX 50 24 points down.  It’s also a time for investors to reflect and consider their financial capacity and mental capability to handle media and market noise.

Accumulators – these are people saving for retirement.

Investors – these are people who are either living off the proceeds of their accumulated (invested) funds or have capital to commence doing same.

For accumulators investing into stocks (shares) through a diversified portfolio of global companies, all market declines are a ‘heaven sent’ Boxing Day sale.  For accumulators, wishing for markets to continually increase is the equivalent of shoppers hoping they can only buy two cans of baked beans next week compared to three cans this week.  For the same $10.  In other words it’s completely nonsensical – but I might add – most common.

Of course there are some questions – i.e. stocks (shares) versus bonds, and or combinations of assets (asset allocation)

Stocks

Property

Bonds

Cash.

There are various kinds of stocks, property and bonds.  For this exercise I’m highlighting – stocks and bonds, for a very good reason.  Everything is starting to go wrong for bonds.  Just as investors are ten times more worried about stock prices than they need to be, they are ten times less worried about bond prices than they should be.  But more on this at another time.

Using US financial markets as a proxy, let me point out the compound and real returns of stocks vs. bonds.

Compound Annual Rates of Return – 1926-2000

Small Cap Stocks             Large Cap Stocks           Corporate Bonds            Govt Bonds

          12%                                   11%                                 5.8%                              5.3%

Net of inflation and tax (real return)

          5.8%                                    5%                                  1.1%                              .7%

Stocks outperform bonds by a multiple of 5 (long term).  So those of you accumulating into KiwiSaver and thinking your investments going into bonds and cash (worse performing than bonds) are somehow better because of A) less risk or  B) better return, need to think again and take some advice.  Less risk means less return.  More risk does not mean loss.

Investor Experience – from Market Bottom

Years              Duration         Context          Recovery       Loss                One Year Return

                                                                        (if investors     (if investors     (12 months after

did nothing)     sold out)          bottom)

1929-32             4 yrs              Great

                                                Depression       4 yrs                 78%                  137%

1939-41             3 yrs              WWII                 9 mths              31%                  64%

1973-74             2 yrs              Oil Crisis           20 mths            44%                  44%

1987-89             3 yrs              The Crash         16 mths            25%                  24%

1989-93             4 yrs              Kuwait War       3 yrs                 45%                  23%

2000-03             3 yrs              Tech Wreck      3 yrs                 49%                  24%

2007-09             3 yrs              GFC                  2 yrs                 57%                  26%

Markets are temporarily in decline but permanently on the increase, for example (common market indices):

                                    2004                           2014

S&P 500                      1146                            1815

Dow Jones                  10628                          16170

Nasdaq                        2054                            4054

UK FTSE                     4412                            6641

Nikkei                           10558                          13960

Hang Seng                  13740                          23025

NZX 50                        2442                            5091

Unfortunately financial journalism is very much not the friend of the long term goal focused, patient, disciplined investor.  Financial journalism is intended to keep you glued to ‘the news’ and has zero interest in making you a good long term investor.  By fixating on the news as opposed to the truth of long term historical perspective you will become more and more anxious.  A nervous nelly – and unfortunately ultimately a statistic in the ‘investors who sold out column’ or one of the risk assessment questionnaire crowd who believes that Bonds will reduce risk (being loss) and Stocks will increase risk (being loss) when the historical facts are quite the opposite (for long term investors).

The percentage of rolling returns periods with positive returns for the S&P 500 (US top 500 companies – a proxy for the US market)

                        5 yrs                770 of 824

                        10 yrs              763 of 764

                        15 yrs              704 of 704

Those stats don’t look too risky to me, especially considering the return from Stocks is likely 5 x those of Bonds after inflation and tax.

The information provided in this blog is not intended to be a substitute for professional advice. You may seek appropriate personalised financial advice from a qualified professional to suit your individual circumstances.