06 Feb Stick to your knitting
“I have found that the importance of having an investment philosophy — one that is robust and that you can stick with — cannot be overstated.”
David Booth, Chairman, Dimensional Fund Advisors
The onset of February has heralded the first significant downturns in world stockmarkets since early 2016. Investors have become used to gently rising asset prices and low volatility, so the recent falls may have come as a shock to many.
It’s worth repeating – this is what stockmarkets do. Over the long term, world stockmarkets have delivered returns of around 10% per annum since 1988¹. But those returns never occur in a straight line and returns have often varied from that long-term average.
The chart below shows the calendar year returns from the S&P 500 since 1926 – an even longer time frame.
Exhibit 1. S&P 500 Index annual returns 1926–2016
In US dollars. S&P data provided by Standard & Poor’s Index Services Group. Indices are not available for direct investment; therefore their performance does not reflect the expenses associated with the management of an actual portfolio.
Past performance is not a guarantee of future results. Performance may increase or decrease as a result of currency fluctuations.
The shaded band represents the long-term average return of 10% pa, plus or minus two percentage points. As can be seen, the returns from the index only fell within this range six times in the last 91 years. The actual returns have followed no obvious pattern.
Despite the apparently random nature of returns, investors can increase their chances of having a successful investment experience by remaining focussed on the long term. The following chart shows the frequency of positive returns over various rolling time periods. As you can clearly see, the longer the investment period, the greater the chances of receiving positive returns.
Exhibit 2 Frequency of positive returns in the S&P 500 Index Overlapping periods: 1926–2016
From January 1926–December 2016 there are 913 overlapping 15-year periods, 973 overlapping 10-year periods, 1,033 overlapping 5-year periods and 1,081 overlapping 1-year periods. The first period starts in January 1926, the second period starts in February 1926, the third in March 1926 and so on. Returns shown in US dollars. S&P data provided by Standard & Poor’s Index Services Group. Indices are not available for direct investment; therefore their performance does not reflect the expenses associated with the management of an actual portfolio.
Past performance is not a guarantee of future results. Performance may increase or decrease as a result of currency fluctuations.
CONCLUSION
It’s easy to stay the course when markets are rising and everything in the garden looks rosy. The real test comes when markets retreat. You can greatly increase your chances of success if you keep a few points in mind:
- Don’t fixate on the headlines predicting that the end of the world is nigh. NOBODY KNOWS;
- Trust that markets are, largely, efficient and that market prices are the best starting point for determining their fair value;
- Make sure that your chosen asset allocation is aligned with your emotional tolerance to risk. If you are over-exposed to risky investments, you will find it much harder to stay the course;
- Make sure that your investment portfolio is aligned with the goals set out in your financial plan (if you don’t have a plan, don’t be surprised if you end up somewhere unexpected);
- Download our Guide to Investing, free of charge, here
Warm regards
Carolyn
[1]. As measured by the arithmetic average of calendar year returns of the MSCI All Country World Index (gross div.) from 1988 to 2016. MSCI data © MSCI 2017, all rights reserved.