THE FOREST OR THE TREES?

FOCUS ON SHORT-TERM MARKET BEHAVIOR USUALLY RUINS LONG-TERM INVESTMENT RETURNS

April 6, 2016

For those with a longer-term time horizon in terms of their investments, solid returns can be realized over time.  History shows that.  But too often (and this has certainly been the case for the last little while) investors become very “spooked” by the volatile market gyrations that we have been seeing for some time now.  I recently came across some data compiled by Bloomberg LP as at September 30, 2015.  While it is admittedly a little bit out of date, as the study goes back to 1980 the few months between the publication date and the first quarter of 2016 are not terribly relevant. 

One of the things illustrated by the data was the fact that with respect to both the S&P/TSX and the S&P 500, from the period from 1980 through 2014, a period of almost 35 years that included many significant ups and downs in both markets, was that the average intra-year drop in the TSX was 16.1%, and in the S&P 500, 14.2%.  So, again, that is the average decline for each index per year from the high of the year to the low of the year.  While this level of decline is not horrible, it is enough to make most investors very fearful.  And, I would note again, this is the average drop each and every year from 1980 until now.

Again, these annual decline numbers are average ones.  In some years the drop off is much less and in others much more.  But even the average numbers have been enough, looking at the historical data, to scare many, many people out of the market.  In Ontario, the two winters before this one were pretty harsh.  It happens.  If you live in Ontario you should not be surprised.  By the same token if you are invested in equity markets you should not be surprised when significant declines occur.  But it’s a lot easier to exit the market than it is to move to another location to avoid things that you don’t like from happening from time to time.

The fact is that in times of market turmoil, many “investors” leave.  I put that word in quotation marks because people who do that are not really investors, and it is unlikely that when they did get back into the market (if, in fact, they ever did) that they were ahead of the game by getting out in the first place.

Notwithstanding those relatively uncomfortable average annual decline numbers, over the period mentioned the TSX gained on an annual basis 74% of the time and provided an average annual return of 6.1%.  Looking at the U.S. scene, the S&P 500 gained on an annual basis at almost the same rate – 75% of the time, with an average annual return of 11.5%.  As those of you who are invested in our model portfolios know, we have always had a much higher equity exposure to the U.S. than to Canada, and it has paid off.  But even if the exposure were 50/50, the average annual return would have been almost 9% over the last 35 years.

The reason to focus on the forest instead of the trees is that if you have the discipline to do that, you will be far ahead of the average investor who tends to exit the market near lows and jump back in near highs.  That’s just “human nature”.  It’s a knee-jerk reaction triggered by feelings of fear or greed, depending on which way the market is going.  Does keeping on a disciplined track over the long term versus getting in and out on a regular basis make a difference in returns?  I would say so.  Over the past twenty years the S&P 500 has averaged annual gains of 9.8%, bonds, 6.2%, gold 5.8%, oil 5.6%, homes 4.6%, and the average annual inflation rate over that period has been 2.3%.  According to Bloomberg, over that twenty year period the average investor has seen annual returns (on average) of 2.8%, barely ahead of inflation.

Keep your focus on the forest and ignore the trees.  It will benefit you immensely over time.

Howard Goodman
President, HG Partners Limited
Director, Private Client Group &
Senior Financial Advisor,
HollisWealth Advisory Services Inc.

This article was prepared solely by Howard Goodman who is a registered representative of HollisWealth Advisory Services Inc. (a member of the Mutual Fund Dealers Association of Canada and the MFDA Investor Protection Corporation).  The views and opinions, including any recommendations, expressed in this article are those of Howard Goodman alone and they are not those of HollisWealth Advisory Services Inc.

HollisWealth is a trade name of HollisWealth Advisory Services Inc. ® Registered trademark of The Bank of Nova Scotia, used under license.

HG Partners Limited is an independent company. Scotiabank companies have no liability for activities outside of HollisWealth.