Search­ing for the long term

Finweek English Edition - - Creating Wealth - Even 20 years might not be enough

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.

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