Let’s consider two fictional clients, Julia and Jim. Julia and Jim have the same needs, same objectives - and they choose to work with the same (perfectly sensible) investment adviser.
The only difference is the point in time that they come to work with that adviser.
Towards the end of February 2020, Julia follows her adviser’s recommendation to invest into a simple portfolio split 60% into the global equity market and 40% in bonds1.
A month later, her portfolio is down by 17.5%.
Source: FE Analytics. Returns are shown gross of costs and charges.
In her better moments, Julia regards her adviser as a moron. In her worst moments she wants him tarred and feathered.
Jim, on the other hand, follows the same adviser’s recommendation to invest into the exact same strategy - just a month after Julia’s initial investment.
Source: FE Analytics. Returns are shown gross of costs and charges.
Jim makes 12.4% in his first month. He thinks his adviser is a genius.
What we have seen here is that Jim and Julia have just been entered into the investment “start date raffle” and they have pulled out two very different tickets. Hugely different initial outcomes, based on nothing more than a month’s difference in the date that they initially invested.
No matter how much you can prepare your client for significant temporary falls in the value of their portfolio during their investing journey, not even the most masochistic adviser would want any client to experience it straight out of the gate.
But it is unfortunately a fact of life that any knowledgeable adviser, who believes in a perfectly sensible “buy and hold” approach to investing, can find themselves on the back foot with a client while the relationship is only in its infancy due to nothing more than a little bad luck.
Some of our clients will invest in “good times” and some will invest in “bad”. We must accept this. For those who aren’t so lucky the key is communication, availability and counsel. There is simply no other choice.
It may be tempting for some to try and time an investment into the capital markets in order to miss out on the big falls. I am not a fan of this strategy at all, primarily because a) asset prices usually rise (so by being uninvested you are betting against historical probability) and b) the market can behave in incredibly counter-intuitive ways in the short term. The market doesn’t care what insight you think that you have, it is going to do what it is going to do regardless.
The below table shows the best, worst and average monthly and quarterly returns for our simple 60/40 equity and bond portfolio going back to 1980.2 I have also included the percentage of occasions when returns over these periods were positive and when they were negative.
Source: FE Analytics, The Money Den. Returns are shown gross of costs and charges.
Short term returns, even for a perfectly well diversified portfolio such as this, can be highly volatile. And predicting whether you are going to get a good, bad or indifferent outcome over such short timeframes is not easy either - the probability of seeing a positive return for this portfolio over a given month has been only a little better than a coin flip.
So how do we improve our chances of success? Well, we just play a different game. One that ignores the months and instead focusses on the years (plural).
If we run the same numbers for this strategy over five, ten and fifteen year rolling timeframes a very different picture emerges. One that places the odds very squarely in the patient investor’s favour.
Source: FE Analytics, The Money Den. Returns are shown gross of costs and charges.
During the past forty four years, you have had to be incredibly unlucky to have lost money in a simple 60/40 equity bond strategy over any kind of sensible time frame. If you were invested for at least ten or fifteen years, there was no chance of losing money (in nominal terms). In addition, your chances of a great outcome were pretty high looking at those average returns.
Investing is all about accepting short term uncertainty to give ourselves the best possible chance imaginable of a great outcome over the long term.
These numbers are unequivocal, if you are invested sensibly for long enough the odds are overwhelmingly on your side. So why oh why do we persist with trying to be too clever?
Invest, lose the password to your investment account, find it again thirty years later and prepare to be amazed. For bonus points, keep investing regularly along the way.
By being invested for long enough we also reduce our dispersion of outcomes as well. The short term uncertainty that we were once so fearful of, simply evaporates away.
The below chart shows the annual rolling returns for our 60/40 portfolio (dark blue line) versus annualised returns for the fifteen year holding periods that we looked at above (orange line).
Source: FE Analytics, The Money Den. Returns are shown gross of costs and charges.
While over one year (still a short timeframe for any self-respecting investor), the dispersion of outcomes is fairly wide and variable, annualised returns over fifteen year periods are a lot more consistent.
So over time, not only do our chances of investing success increase - but the outcomes smooth out and become more consistent as well.
Cliches are cliches for a reason sometimes. Taking a genuinely long term approach to investing is such a hack. It is like discovering a cheat code. The whole thing just becomes so much easier.
So if you, like our Julia, get off to a tough start to your investing journey and pull the wrong raffle ticket - never fear, time is a great healer.
Past performance is not indicative of future returns. None of the above is intended to constitute advice to any individual.
For our simple 60% stock/40% bond portfolio I have used the MSCI World index and the FTSE 10 Year Treasury index in the relevant proportions.
This is when the data for the bond component of our portfolio, the FTSE Treasury Index, kicks in. For those who are interested, I have chosen to “rebalance” the portfolio annually at the end of each year.
This is great, a handy message to send to new clients!