Worries Abound, But Investment Returns Will Still Come
Key Takeaways
When invested for the long term, your returns are positively skewed.
Concerned that the investing environment has changed? Returns over these past few years was quite normal. 2019 to 2021 were positive while 2022 was negative; positive returns 75% of the time.
If you held our globally diversified portfolio (Var 16) and stayed the course from 2019 to 2022, even with last year’s losses you’d still be up around +20%.
You don’t need to know what this year’s returns will be like — knowing the range of possible outcomes, remembering why you started investing and staying the course ensures your outcome is positive.
The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage.
Consider everything we have been through in recent years: a global pandemic, a near total shutdown of the world for a number of months, rapid inflation, supply chain problems, war in Europe, fastest rate hikes in history and now a banking crisis. It’s normal to feel scared in the face of so much uncertainty.
Imagine that you were in 2019 and somehow knew these things would happen over a short period of time over the next few years. What would your predictions of market returns be? Probably vastly negative or at best, flat with no returns.
But as you can see in the diagram above which plots the returns of a VaR 16 portfolio, one of the core equity investments which clients use to accumulate wealth, $1 invested would have become $1.20. That is a cumulative 20% return which includes last year’s bear market.
Usually when you assess your investments on a shorter timeframe, you may leave out the history and assume that you are in a new environment of poor returns.
The Big Picture
With 2022 behind us, we now have 47 years of good data on the expected outcomes of our core portfolios. The histogram below shows the distribution of annual returns of the same VaR 16 portfolio.
Looking at it gives you a good idea of what to expect over a longer period of staying invested. You will notice that the histogram is skewed to the positive side — meaning that the majority of your returns will be positive. Another thing of note is that while negative returns are part and parcel of investing, it happens less often than you think.
Recent Past
Let’s look more closely at recent history. In the chart below the returns from 2019 to 2021 were positive (green highlights), with 2022 negative (red highlights). These years are very representative of how markets work — nearly 75% of your returns will be positive, and you will see losses 1 out of 4 times.
How can we explain that markets are working normally when it seems to some people that everything is falling apart? Think of publicly traded stocks and bonds as an efficient news-processing machine.
When bad news comes in, prices drop. When good news comes in, prices rise. Everyday prices are set to induce investors to come in to invest. If the stock market had a negative expected outcome, nobody would want to get involved.
One of the most important principles that we always advocate is to have an investment plan you can stick with. The investment plan should always remind you and state the reasons why you needed to invest in the first place. Next, it should always cater to a range of outcomes — both good and bad, so that you know what to expect when things don’t go your way.
If during this period you felt like you had to bail out of your portfolio for some reason, then you have either probably forgot the reason why you wanted to invest or invested with the wrong framework in mind. But if you keep reminding yourself of the bigger picture and the end goal, there was a good chance that you didn’t have to make any adjustments.
So which part of the histogram will 2023’s returns fall into? We really don’t know. But you don’t need to know to invest for your future — if you know what the range of possible outcomes are, then you don’t need to rely on any prediction for this or any particular year.
If you are looking to optimise your investments, are worried about what is happening or want a second opinion, come and have a chat with us.
