What Does It Mean To Invest For The Long-Term?
Key Takeaways
The longer your investment horizon, the higher your chances of getting a positive investment return.
Using one of our globally diversified portfolios for as an example: investing for 5 years in this portfolio across history can yield a varying annualised return of -7.1% in the worst case scenario, and 33.4% (best case) depending on when you invest.
For the same portfolio, but investing for 10 years, your worst case scenario annualised return drops to -0.6%.
20 years annualised return (worst case scenario): 1.9%
30 years annualised return (worst case scenario): 4.2%
In the short run, the market is a voting machine but in the long run it is a weighing machine.
— Benjamin Graham
This famous quote was paraphrased by Warren Buffett in a 1987 letter to his shareholders. In it, he explained that in the very short term, a highly-strung emotional person called Mr. Market would appear daily, hourly and even at shorter intervals to name a price in which he would buy your interests in businesses (stocks) or sell you his.
Some days he is very optimistic and will shout out high prices because he fears you may take his shares. Other days he is manic depressive and sees nothing but gloom. On these days, he will name a very low price as he fears that you may unload your shares on him.
In essence, the underlying business and the operating results don’t change drastically daily, but Mr. Market wants your vote everyday. He ignores long-term business success and profits because of his volatile emotional state. However, over the long run, he would eventually confirm a sense of stability when you aggregate all the quotes that he has thrown at you in the past — hence the weighing machine.
Many investors don’t have a framework or perspective when told to “invest for the long-term”. Some think that 5 years is a long timeframe, whilst others think that it’s more like 10 years. It is a fact that your investment outcomes improve the longer you hold a globally diversified investment. What does this mean, and how does it look like?
Consider a 5 Year Timeframe
The graph below shows the rolling 5 year returns of a representative GYC VaR 16 portfolio. You can see that there are big variations in your 5 year returns. This is mainly driven by luck i.e. dependent on the economic situation during the period when you first invested your money.
Doing so in the worst period would give you an annualised return of -7.1%. That meant from a $100,000 investment, you would be left with only $69,196.
The best period would give you an annualised return of 33.4%. A $100,000 investment would grow to $422,454.
On average, returns were 8.2%. $100,000 would grow to $148,298.
Now Stretch That Timeframe to 10 Years
When we move to rolling 10 year returns, you will notice that the disparity between the lowest and highest returns becomes smaller. However, investing for 10 years does not preclude you from losing money.
Investing at the worst period gave you annualised -0.6% returns. That meant from a $100,000 investment, you would be left with $94,159. This is something many investors experienced when investing through the 2008 global financial crisis, also known as the lost decade.
The best period gave you annualised 19.8% returns. A $100,000 could become $608,931.
On average, returns were 7.9%. $100,000 could grow to $213,902.
What About 20 Years?
An interesting thing occurs when we move to an even longer timeframe — 20 year rolling periods. Now you will see that when you put your money into a diversified investment for such a duration, you don’t lose money — even if you had terrible luck and sat through two of the worst bear markets (dot-com bubble and GFC).
The worst period gave you annualised 1.9% returns. That meant a $100,000 investment, would have yielded $145,708; not great but you did not lose money, even in the worst case scenario.
The best period gave you annualised 12.4% returns. A $100,000 could become $1,035,920.
On average, returns were 7.1%. $100,000 would grow to $394,266.
And Now 30 Years
The magic happens when you put your money to work for 30 years. The difference between your worst and best returns becomes much closer to the average, helping to boost your accumulated wealth even if you had the misfortune of investing during the worst possible time.
The worst period gave you annualised 4.2% returns. That meant a $100,000 investment, would have yielded $343,583.
The best period gave you annualised 11.1% returns. A $100,000 could become $2,351,916.
On average, returns were 7.1%. $100,000 could grow to $782,860.
So How Long is Long Term?
To be a successful long-term investor means holding on to good assets - globally diversified investments such as the one shown above for periods beyond 10 years. Ideally, the longer the better. Some of you may lament that 30 years is just too long and it may be too late for you to start now. However, we would argue that it’s not true;
Imagine you are 60 years old now and are nearing/ have retired. Don’t be surprised that in a matter of time you could be 90 years old, still invested and still drawing down on your assets. That is a 30 year timeframe! Given how life expectancy has been creeping up over time, this scenario is very possible. Besides, drawing down on your assets placed in deposits or in very conservative investments like T-bills, SSBs or bonds just ensures that your money does not keep up with inflation over time.
Help the next generation. Your children or grandchildren would be able to use this knowledge and power of the markets to save and generate wealth. Help them not to repeat the mistakes that you made for your own investments.
Of course we are promised nothing as investors in terms of future returns. However, knowing how long-term returns and how markets work will help you stay seated even during the worst of times. Looking at these numbers, its hard not to be optimistic about the future - given how we have already experienced so many bad market events and was still able to emerge positive.
If you have questions on how to implement such an approach for your investments, come and have a chat with us.
