Our Investing Beliefs — Pt 2
Key Takeaways
The period of time that constitutes ‘long-term investing’ can vary depending on which definition you look at. For us it’s about riding through market cycles to generate sufficient returns for your needs.
While global stocks provide the best return in the long-term, there will be periods where other asset classes can perform better.
If you only look at the short term, then your investment performance depends on luck and catching the right part of the cycle. But when you stretch that time frame long enough, luck has little bearing on your outcome.
Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.
In the continuation of our series on our investing beliefs that form our investment philosophy, this article focuses on long-term investing.
The understanding of long-term investing can vary greatly from person to person. This is because there is no quantified timeframe to determine what is “long-term” in the investing context. There are actually a myriad of different definitions as to how long that period actually is. Some say it is 5 years, others say 10 — for us, long-term investing means to stay in the market for the appropriate amount of time in order to ride through market cycles and to generate sufficient returns for your needs.
Far too often, many people see investing as a quick way to make money, and in some instances, that can happen — people can get lucky when buying something and make a big profit. That quick profit can accidentally be attributed to investment skill rather than luck. Recall 2021, many individuals were caught up in a digital asset boom and assumed (wrongly or otherwise) that it was the next big thing.
There were many stories and reports of how people made thousands from selling and trading digital assets, prompting many investors to jump on the bandwagon, hoping for the same outcome. An Indonesian student reportedly made a tidy sum selling his expressionless selfies on an NFT marketplace!
However, instead of making its holders wealthy and multiplying their investment, NFTs have fallen a long way from their highs in 2021. A recent report in the Guardian noted that the vast majority of these digital assets are now worthless.
The recent pandemic also brought about the return of day traders with many trading stocks in the hope of striking it rich. It also gave rise to meme stocks like GameSpot, and AMC. The latest meme stock craze in 2023 has since moved on to names like Tupperware, Rivian, and AMD.
Now, we’re not here to demonise day trading, it is fine — as long as you are doing it for fun, with a small amount or reasonable proportion of your savings, and are fully aware of the risks. The problem arises when investors mistake day trading as a good way to multiply their assets efficiently, with little to low risks. Unfortunately, the truth of the matter is not so. Retail traders suffered big losses in 2022, and even led to some of them committing suicide.
As such, a core investment belief of ours is that markets reward long-term investors; and so investors need to understand that they will need to hold through a certain period of time in order to ride out market cycles. In addition, understanding which asset classes provide the best risk and return profile for yourself would ensure that you invest in the right mix of assets.
The chart below shows the growth of $1 invested in various asset classes. The returns have been adjusted for inflation but do not account for the related fees or transaction costs.
At first glance, you will see that global stocks have provided the best return over the long term. However, what you will also notice is that it can go through long underperformance cycles — for instance, the rather long period after the 2008 crisis, with Singapore stocks doing far better for years after. Even when you invest globally and in a diversified manner, there are times when other asset classes will be doing better.
There will also be times when other assets like property or cash can outperform your investments. This is why there are periods when you may hear comments or read in the financial media about how “properties are the best asset” or “gold has tremendous returns”. When the truth is that it really depends on catching the right part of the cycle. But when you stretch that time frame long enough, global stocks are likely to win out by a pretty huge margin.
If you had any doubts as to whether stocks are the right asset class for building wealth, Professor Jeremy Siegel’s research on stock returns from 1800 shows that its returns beats all others quite convincingly. The key point is that it needs to be diversified and over the long-term.
So don’t give up if you enter a rough patch — your patience will be rewarded.
If you want to find out how long-term investments are structured and can help you realise your long-term vision and goals, come and have a chat with us.
