No one can rest easily when our portfolios or super nest eggs are being devalued by excessive market overreactions, but unfortunately it goes with the patch, especially if you’re a long-term investor.
If that’s you, you’re at the mercy of the market elements at the moment and it could be some time before we see a break in the black clouds covering the blue sky, but we’ll inevitably get one.
So, what action should you take? I suggest nothing! Let’s see if I can prove the wisdom of this advice.
Fortunately, a long-term investor has time on his or her side, but that doesn’t prevent our patience from being tested. Some investors can’t stand periods like this and go to cash or start playing the short-term trades – some with success and many with failure – but personally, I like staying the course. Why? History’s on our side.
I have used this argument before, but it needs repeating after a week like last week. Between 1977 and 2009, the guys at Vanguard tracked $10,000 in shares and other assets based on the idea of letting the proceeds roll. US shares returned around $601,000, Aussie shares $453,000, international shares $392,000 and cash returned $310,000.
The study, which included crashes in 1987, 2001-02 and 2008-09 as well as many corrections and recessions, showed that a diversified holding on assets makes sense because they all did pretty well. However, shares reaped the best rewards because they are the riskiest of the assets looked at.
What’s interesting is that investors who only held shares in the US or international markets were wealthier in 2000 than they were in 2008-09! But they were still better off.
For Australia, our $10,000’s value peaked in 2007 and has fallen ever since, but it still ended up as a $453,165 return, to be precise. Australia actually didn’t lose much in the dotcom crash in 2000 and beyond, but we sure copped it in the post-GFC one!
A thoughtful colleague pointed out that this analysis doesn’t include what happened over 1930-50 when markets didn’t progress much. But, not only was there a Depression during that time, but there was also a ‘little thing’ called World War II, which hurt more than a few share prices.
These days, global demand has more help than in the 1930s and 1940s. We have China catching up on the Western World’s materialism, India throwing off the centuries of underdevelopment, and Russia and Brazil becoming world forces.
As of the weekend, the Dow is now at 10,817.65, down 4.01% for the week and 6.56% for the year. The S&P 500 is at 1123.53, down 1.5% on Friday but down 10.66% for the year. Our S&P/ASX 200 is down 13.8% for the calendar year so far.
This is all painful, but not enough for a long-term investor to turn tail and run to term deposits.
Sure, you could cash up by selling companies you no longer like and, say, buy the index after every bad day. Or on the other hand, you could dollar cost average into the best Aussie companies on very bad days, but this means you will have to time the market well. (Dollar-cost averaging is when you build-up shares over a period of time based on a fixed-dollar amount – like $20,000 – rather than the number of shares.)
History says time works better than timing, but a good timer can beat this rule of thumb.
I’ve had a good year so far in pointing to likely market developments. Before May, I kept telling regular readers and clients that while history says “sell in May and go away”, I didn’t sell. Why? I’m a long-term investor. Yep, I have bought on bad, scary days, but I don’t lose any sleep over it because I hold great companies that will eventually come through.
By the way, I will play this game until my seventies and then go a little more conservative and hope that my nest egg and my old bones make it to the nineties. Here’s to long-term investing and long-living!
One last thing: Jack Bogle, the man behind Vanguard, recently told FOX Business that you should ignore the old saying, ‘don’t just stand there, do something’ at times like this. He recommends the opposite: stand there and do nothing!
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