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I feel really fortunate, and I’m always grateful for working with clients whom I enjoy working with – who get what we do together, and who are in ‘it’ for the long term. We have had some insightful conversations over the past 10 days, where clients’ resolve and commitment to what we practice being put under the spot-light. In summary, it is OK to feel fear, it is not however part of the plan, to act on that fear.
Just as we do not change act on greed when things are going really well, and when the story is positive. In those situations we do not change course, we do not throw our plan out the window. The very same is true when things are going less well in the short term.
That may seem an unusual sentiment to open a Blog entitled ‘Are Equities For The Scrap Heap’, but I feel compelled to nail our colours to the mast at the outset. I am always open, and deliberately expose myself to contrary thinking, the fact remains that Equity investing has delivered the greatest outcomes for patient and long term investors. That fact will have come into question in people’s minds in recent weeks, so I’m going to share with you in this short piece exactly where Equities are right now – and encourage you to decide for yourself.
Option A or Option B
As seriously life-altering and indeed life-taking the current health crisis is, there are umpteen videos and jokes floating around about it’s impact on how we are currently living our lives. I’m happy to share that a primary value and priority for me is ‘family’ and being present with them, however I had a rare belly-laugh when I was sent a video which went something like this:
A man is looking directly at the camera, he takes a seat – then a dramatic voice-over tells him that he is being quaranteed to self-isolation for a period of 2 months. He has two options to choose from.
Voice-over states “You can choose Option A, which means you will be staying at home with your wife and children in isolation for 2 months”. Our man takes that on board for a second with a reflective expression.
Then the voice-over says; ‘Or, you can choose Option B, which…….’
The man immediately cuts him off and shouts; “Yeah, I’ll go with Option B”
In a way, that Binary decision he had between two different options is similar to the Binary decision that equity investors face – there will be a winner and a loser. In the past, majority of us who reacted when markets were in decline ended up as the losers. Surely, we all want to win for our family and for our future selves.
I had no intention of talking about my values when I started this piece, really! But ‘truth’ or more so ‘honesty’ is another of my core values in personal and professional life. I was asked by a client and friend last week how the recent market performance has impacted on the average returns of equities over time. In jest they said that this has made smithereens of the averages I have been talking about from equity investing. If you have not been a regular, in the past I have spoken frequently about long term averages of 10%+ from equity ownership.
For many of us it is very easy to end up only talking about something, or publicly sharing something when it is in a positive condition. For example, you don’t see too many people sharing pictures of themselves on holidays if they feel they aren’t looking very good – or posting about the €100 bet they just lost etc. We tend to only do these things when we’re winning. In line with my value of ‘truth’, lets now take a look at how exactly equities have performed over the longer term, in light of the recent Bear Market conditions.
In investment terms, many of the traditional sources of advice suggest that anything over 5 year term is suitable for investment – I’ve always suggested 7-10 years is a far more favourable and prudent time-frame – that still applies, in my view at least.
10 Year Average Returns
From February 1st 2010 to same date in 2020, the 10 year total returns from Global Equity had been +212%
From March 20th 2010 to same date in 2020, the 10 years total returns from that same Global Equity index had been +110%
Both 10 year periods, just happens that the latter concludes with the most dramatic and brutal 20-odd trading days that many of us have witnessed.
So, the +212% over 10 years equates to an annual rate of return of 12.05% (when you compound for 10 years = 212%, trust me!)
The +110% over 10 years equates to an annual rate of return of 7.7%.
Worst Case Scenario
Imagine that you had invested 10 years ago, or heck that you had set up a pension 10 years ago, and you are now drawing on the benefits – just right now this moment (not forgetting that it’s Friday 20th March 2020!) – you are drawing your benefits at quite possibly one of the absolute worst points in history to do it – in a rapidly declining market (please don’t try this at home).
Despite your investments having endured one of the worst runs imaginable, Black Swan stuff, you have achieved a positive 7.7% return from your investments. Even allowing for fees of 1% and inflation of say 2% over that term you have grown your purchasing power to the tune of 4.4% every year.
How Have Bonds Done?
I could, and probably should cut this article right now, but I’ve a curious mind – how has a pure Bond index done over that same period of 10 years?
A pure Bond index, which contains blended Government and Corporate Bonds, long and short, majority in AAA and AA rated, so this is a very well regarded Bond index. It has delivered 41.9% over that exact 10 year period.
Annualised return of Bond Index over the past 10 years = 3.56%
You might say; “Ah sure that’s half as good as Equities, why bother exposing myself to the volatility of Equity”. You don’t need me to remind you that when we take a fee of 1%, and inflation of the illustrative 2% from 3.56%, you are left with a net growth of your purchasing power of 0.56%.
Fees for most investors are higher than that, see our Blog 121 for more info on that!
And that, dear reader, is why, even in the pits of a global pandemic, when the world feels like it is coming to an end, when media is telling us every minute of every day that our pensions and our investments are ‘going up in smoke’ – that we might very well be best to focus on what we can control, which is our behaviour, our action, and our focus on other aspects of life which our input and endeavour would be far more productive.
For what it may or may not be worth to you, as of Friday 20th March, a month into this quickest and most savage of Bull Markets, the value of that same Global Equity Index were pretty-much on a par with where they were at the bottom of that ‘Blip’ we experienced in December 2018.
I was reminded in a conversation today, Monday 23rd March, that yes, that fact may be the case, but that this time has FELT worse. And that is a really key differentiated here. The pandemic we have been reading about and worried about for ourselves and our loved-ones has exasperated the market declines. Had you invested a €1m on 25th December 2018, you would be back to where you started, but it has FELT worse.
It might feel like the end of the world, but market performance is within the range of expectations for any well diversified portfolio.
Time and time again it has been shown that emotion and investing don’t mix. Or to be more accurate, acting on our emotions and achieving our long term investment goals are mutually exclusive! Tenuous link to the concept of ‘Binary’ there sorry!
If you are like me, you are getting to the point where you love a little distraction from the constant coverage of where the pandemic is at, where the markets are at. Indeed, it is difficult to read anything else these days. I think I heard Seth Godin refer to the concept that it feels like ‘drinking from a fire-hose’, which is never a good way to drink! If you feel like that then perhaps turn it all off – don’t look at the Irish Times App, don’t read the news, don’t listen to the radio. Turn me off too! In modern society we have a ccess to so much information – but we also have control over what we read, listen to and watch – really we do – try it!
I have found solace in music, and in the wonderful Tiny Desk concert channel on Youtube – they recently had couple of the guys from ColdPlay, and the awesome ‘For Love Choir’. Coldplay are not a band I’ve ever listened to much, but I really liked it; worth a watch here.
Thanks, and I hope you and yours are doing well, really.
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