By Andró Griessel
Why you should ignore a decade of returns
A few years ago, a friend convinced me to join them on the Karoo to Coast mountain bike challenge. You are fit enough, they said. It is mostly downhill, they said. It will be fun, they said.
A few months before the start of the race I started gathering my troops, but as we got closer to the race the excuses escalated until finally, on race day, I alone showed up for the “team”. Armed with my bicycle that dated from the 1990’s and seemingly made with the same metal that church bells are made of, complete with brake pads that connects to the outer rim (which I later found out pressed against the wheel during the entire race) I decided to take on the challenge.
Long story short, I finished 8 hours later with an average heartrate of 180 bpm, an aching behind and visions of people who have long since died.
Performance, or sometimes simply the ability to finish what you have set out to do, takes a lot of blood, sweat and tears.
I’m therefore astounded to think that investors expect that exceptional long-term performance is possible without having to endure extended periods of under performance.
The tendency to chase the rainbow (the equivalent of riding downhill only) is deeply rooted in our psyche and I want to argue that we are in a period where investors have recently signed up for an offshore investment race with stars in their eyes and a belief that this is going to be one long downhill race to the pot of gold at the end of the rainbow.
Where does this perception come from?
- If you invested R 100 000 in a fund 25 years ago (the beginning of 1995) that was able to mimic the S&P500 Index (after fees) your investment would have grown to R 5.7 million. The average rate of return (in rands) was almost 17% per year.
- The return over the last 11.5 years was 22% per year and over the last 4.5 years was an astonishing 35% per year! The last 2 figures received significant media attention over the last few months.
If the road from Uniondale to Knysna is downhill, does it matter how steep the hills are in between and whether you are fit enough for the whole journey?
Of course it does!
When you are therefore a long-term investor and intend to invest during the whole cycle of the market it is important to have a complete picture of what you can expect from start to finish.
So why am I sceptical that investors who invested offshore NOW will not have the ride that they think they signed up for?
See the graph below that shows the performance of the S&P 500 for the last 25 years, and note the following:
Everything that I (and you for that matter) have read in the media over the past few months, making the argument FOR offshore investments, referred to the period between point A and point H and between E and H and created the perception that these returns were generated in a straight line.
It is therefore also important to take note of the periods from B to C and D to E and more specifically from B to F because, mark my words, this kind of (lack of) returns are definitely going to be part of your investments experience at some point.
Take the amount that you currently have offshore or intend to invest offshore and apply it to the numbers below, then decide for yourself if you would be able to continue to paddle with the same determination if you end up in these turbulent waters.
- From September 2000 until October 2002 your investment declines by almost 44% and even though the rand depreciated against the dollar (which effectively decreased your losses), after 2 years, you are still 19% lower than where you started.
- From October 2007 until March 2009 your investment declines with 50% in dollar terms. Again, this correction is followed by a weakening rand and over this 16-month period your investment “only” falls with 30%.
- The unlucky investor who started his race in September 2000 (point B), probably on the back of outstanding historic performances, faced a hill from day 1 and 11 years later (yes you read correctly) (point F) is only able to get back to the same level where he started (0% in dollar terms). In rand terms he did however manage to gain 2% p.a.
- The same investor as above, would, at the end of the 2008 financial crisis (point E on the graph), after being invested for almost 9 years still be down by almost 18% (in rand terms) since he started way back in 2000.
My conclusions regarding the above observations are as follows:
- The well-known investment guru, Warren Buffet, has a saying that you cannot sell right, you can only buy right.
- Based on where the S&P 500 Index is now, ask yourself whether this is a good entry point, because if Point H is the same as point B, there might just be a very long uphill ahead. And then I am not even talking about the so-called FANG Shares (Facebook, Amazon, Netflix and Alphabet/Google) listed on the Nasdaq. These shares have rallied massively over the last few years.
- Be wary of simple answers to complex questions.
- For a lot of investors, an overweight exposure usually makes sense, but if returns are not important, the valuation levels of currencies and assets are probably something to take notice of. The notion to buy at any price and hope for the best is probably not a meaningful strategy.
- Statistics are helpful, but it can also be misleading and risky. If you measure the return from the lowest to the highest point in the market cycle and use a relatively weak currency, the picture is obviously very attractive. It is important to remember that these two datapoints (currency valuation & market valuation) can change quite rapidly.
- In my opinion it would be too optimistic to believe that the stock market in the US is going to repeat the recent market rally in the following decade. Be vigilant of overoptimistic assumptions and biased portfolio allocations and make sure that you are able to face the slopes ahead.
Andró Griessel is a certified financial planner and director of ProVérte Wealth and Risk Management. Contact him at firstname.lastname@example.org.
Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. ProVérte Wealth & Risk Management is an authorised financial service provider with FSP no. 5966.