When it comes to equities, it isn’t about timing the market but rather time in the market. John Parsons of Parsons White Wealth Management advises that doing nothing is often best.
Let’s be realistic: managing finances isn’t something that most people enjoy doing. It can be confusing, it can be disappointing, and it can be a lot of work. More often than not, we’d prefer to sit back and ignore it. The good news is sometimes just doing nothing will work in your favour. It’s not often the case but in terms of your finances, once you’ve invested wisely. with a trusted adviser, doing nothing is the best course of action.
Looking back on 2016, we can now recognise what a challenging 12 months it was for investors. There were all-time highs in market indices in the US and UK, but there were also bouts of volatility and quick, steep declines. Markets recovered from fears over commodity prices and Chinese growth at the start of the year, but were then buffeted by the Brexit vote in June and Trump’s election in November. Yet markets bounced back once again.
This bouncing back, this ebb and flow, truly is the nature of equity investing. But it is understandable that investors, the clients whose money it is that’s ebbing and flowing, might be concerned about such short-term fluctuations. But what’s also true is that the sharpest falls and largest gains are often concentrated into short periods of time. Investors who try to time the market to avoid thefalls, or who lose faith and sell out at the bottom, are highly likely to miss the gains.
The benefits of investing wisely and then doing nothing are illustrated in the chart below. It is a sobering reminder of the potential costs oftrying to time the market. Even missing a small number of days in the market can have a devastating effect on an investor’s total returns.
The waiting game
So, the moral of this tale? Once your money is invested by a trusted adviser simply sit back and do nothing. Ideally, you should do nothing for a minimum of five years. If you can hold on and do nothing for 10, that’s even better. Oftentimes, people don’t realise how much they need to save or for how long, and it’s for this reason that many people can face financial challenges in later life – unless they adjust to the new reality of a world of low interest rates.
A timeframe of five to 10 years really is the minimum for equity investing, on the basis that it allows investments to ride out the ups and downs of a normal market cycle. This is backed up by separate analysis by Ritholtz Wealth Management of the S&P 500 Index over nearly 90 years. Ritholtz’s March 2015 report shows the benchmark US index recording positive returns across 88% of all five-year periods. That figure rises to 94% for 10-year periods, while there has yet to be a negative return over a 20-year timeframe.
Despite this, a Schroders study of 20,000 investors (Schroders Global Investor Study 2016) reveals thatonly 33% of UK investors hold their investments for more than five years. Clearly, the long-term message is going unheeded by many investors. The Schroders survey finds thatp rivate investors are often impatient when it comes to investing their money, with shorter time horizons and more immediate goals trumping the potential for long-term gains. On average, investors expect to hold their investments for a littleover three years, which the studyobserves may be “fine for cash and certain types of bonds” but that it “will often prove too short a time period to counteract the volatility associated with equities”.
Schroders Global Investor Study 2016 highlights varying degrees of understanding about the different elements involved in building a pot of money to generate an income. While it shows that people have realistic expectations of how long they will live in retirement, it also reveals that some greatly overestimate the returns that might reasonably be generated in the current climate.
The Schroders study shows that, on average, UK investors expect to generate an income of 7.5% a year – double the FTSE All-Share Index’s current 3.75% yield. Globally, people expect their investments to return 9.1% annually, which is far higher than the MSCI World Index yield of less than 3%. According to the study, millennials have even more unrealistic expectations, with a minimum desired level of income of 10.2% per year, compared to 8.4% for investors aged 36 and over.
This worrying misapprehension about realistic returns is likely to have a profound effect on long-term savings behaviour, according to the Schroders report. Compounding at an annual rate of 9.1% over 20 years, savings of HK$20,000 per month would build a sum of HK$13,528,600. At a more realistic 4%, however, the total only comes to HK$7,335,400.
A new reality
Looking back at historic interest rates and market returns provides a stark reminder of how times have changed, and how disconnected some investors are from the new reality. For instance, according to a Bank of England report in October 2016, UK interest rates hit double digits some 30 years ago, and stayed there or thereabouts until late 1991, with a peak of 14.8% in 1989.
In contrast, interest rates are now expected to stay close to zero in the UK, Eurozone, US and Japan for some years. Indeed, markets are currently assuming that UK interest rates will not rise until 2020. Against that backdrop, it seems that many investors’ expectations belong to a bygone era.
With interest rates around the globe stuck below 1%, achieving an annual return of 8% or 9% is a near impossibility without taking on significant levels of risk, according to Schroders Global Investor Study 2016.
So, what does this mean for you and your financial plans for 2017 and beyond? It all comes down to finding the right adviser, someone who’s the right fit for you and whose advice you trust, then sitting back and being patient. It’s a long game but all good things come to those who wait.
Parsons White Wealth Management is a DB-based Partner Practice of St. James’s Place Wealth Management. It provides face-to-face wealth management advice to private and corporate clients with a focus on long-term relationships. Call 2433 6980, or visit http://sjpp.asia/pwwm.