By Martyn Wild.
The headlines continue to be filled with stories relating to macroeconomic tensions, endless conjecture about the prospect of the tightening of US monetary policy or the recovery of the European economy. Naturally, we are often asked to recommend tactical tilts to protect against or capitalise on anticipated market moves. We think that this is the wrong question to ask.
I was watching a music documentary on The Eagles recently, during which the guitarist Joe Walsh said;
“As you live your life, it appears to be anarchy and chaos, and random events, non-related events, smashing into each other and causing this situation or that situation, and then, this happens, and it’s overwhelming, and it just looks like what in the world is going on? And later, when you look back at it, it looks like a finely crafted novel. But at the time, it don’t.”
The point is that in times of extreme stress (in particular), there is a natural human temptation to ‘just do something’. In the world of finance, this is exacerbated by commercial imperatives; not least, how our peers are doing and what strategies we think clients want to buy. As it pertains to this discussion, we certainly would avoid tilting away from strategic asset class weights. Market timing is akin to playing black jack at the casino: you might win the occasional hand, but play long enough and the house will generally win. Market timing is hard.
Timing is everything, but not in the way you think…
The longer you hold an asset (or portfolio of assets), the narrower the range of outcomes, i.e. the difference between the highest and lowest return. It’s just math. Have a look at the charts here that are based upon the US stock market as proxied by the S&P 500 Index with dividends re-invested since 1 January 1990 (source: Thomson Reuters).
This first example shows the max, min and average returns one could have realised by investing in US equities for 1, 5 or 10 year periods at a time, start to finish. The second chart shows the performance of these three holding periods through time.
Chart One
Chart Two
The impact of increasing the investment horizon on returns is obvious: the longer you maintain the position, the more certain the outcome. Improving certainty is, after all, the whole reason we build portfolios in the first place. Smooth investment journeys have an added benefit in that they are less sensitive to when you invest. That’s important when you come to retire – especially if you retire after a market crash.
So what does this all mean? Well, none of what we've said removes the need to implement first class portfolio construction, of course, but mainly it means that investing for as long as possible can dramatically improve the stability of outcomes. Nor does it require skill as such, only patience and fortitude.
In layman’s terms, long investment journeys are likely to be less eventful and therefore more certain than short ones. We assert that this is a preferable strategy for most clients. So the next time markets look like they might be ready for a correction, instead of asking your adviser to suggest opportunistic trades, perhaps you’d be better served by encouraging them to stick to the strategy or as Joe might say, 'take it easy…'
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MARQAM is a privately-owned, boutique consulting company focused on providing superior investment outcomes for clients and greater profitability for businesses. We are not affiliated with any other financial institution
Disclaimer: The information provided here is for interest purposes only and does not constitute investment advice or a recommendation of any kind.