Searching for the long term
APART FROM traders and investors with some inside knowledge of a special situation, equities should be a long-term investment. That’s what I’ve always been taught and what I tell people. But what exactly is long term? A rough rule of thumb is at least five years. But that’s only rough; what’s important is the period covered by the five years – and those can differ greatly.
Investors are currently seeing this as the healthy returns notched up in the 2005 to 2007 bull markets are eroded by the downturn since mid-2008. It’s not a pretty sight, especially for people looking at their retirement funds.
Many of the studies that argue for and show equities as the best performing longterm investment are based on 20 years. But even that relatively long timeframe is no guarantee, especially when factors outside the performance of a single stock market enter the picture.
Prieur du Plessis, chairman of the Plexus Group, conducts some fascinating work on markets. Here’s one of his latest findings. Equity investors following a buy-and-hold strategy in the US market have lost significant amounts of money over the past 10 years, in both nominal and real terms (after adjusting for inflation).
The exact amounts are negative 2,4% nominal and 4,9% real over 10 years. Over five years (the rough rule of thumb) it’s even worse: negative 4,3% nominal and 6,8% real.
As Du Plessis puts it, a US$10 000 investment in the S&P 500 index made 10 years ago was worth $7 843 on 31 January 2009. “When taking inflation into account the $10 000 investment’s buying power is reduced even further to $6 051.”
What’s important is that the loss only becomes a real loss if the investor sells the shares. But still, 10 years is probably a reasonable investment horizon and somebody who invested 10 years ago with a specific goal in mind is going to be very disappointed.
Du Plessis’ research shows returns are better over 20 and 30 years, with the S&P 500 giving a real return of 4,8% and 6,3% respectively. Of course, shorter periods are seriously distorted by the recent collapse in equity prices in the US. But the principle holds true: positive returns are not guaranteed, even over 10 years.
South African investors on the JSE have done much better (in rand terms: see graph). “Due to the strong growth in emerging markets over recent years up to mid-2008, South African investors have experienced strong returns in rand terms, with all periods up to 31 January 2009 delivering real returns exceeding 7%/year,” Du Plessis says.
But those are returns in what’s been a depreciating currency for much of the time. It’s fine if you live in SA and will spend the profits here. But not if you’re investing on the JSE in US dollars. Compare the graphs to see the large difference the rand makes.
“Though investors have enjoyed positive returns in US dollar terms over five-and 10-year periods, the weakening rand has significantly detracted from performance,” Du Plessis says. And he points out that over longer periods the picture is rather dismal. Real returns by the JSE in US dollars are negative: 0,5% over 20 years and 0,1% over 30 years.
“It’s little wonder foreign investors tend not to marry our stock market. To attract long-term foreign investors it’s imperative for SA to create an environment conducive to a stable rand.” Du Plessis says that includes responsible fiscal and monetary policy, a sound economy and a healthy political climate.
We haven’t done badly on the first three factors. The current political climate is the open question. Perceived political risk has become probably the dominant foreign investment constraint in the run-up to SA’s election.
And though foreign investors are fickle, we need to try and attract their money for SA’s current account. If it stays in the stock market for the long term that’s even better.