Patience is possibly the most important virtue when investing for long-term growth. In fact, one of the world’s most successful investors,1 Mohnish Pabrai goes further, emphasising that ‘‘the number one skill in investing is patience – extreme patience.”
However, there is continued evidence that investors act impatiently against their own best interests. Earlier this year, DALBAR, a financial services market research firm, released the results of their 30th annual Quantitative Analysis of Investor Behaviour (QAIB) study to the end of 2023. This study measures the effect of investor decisions to buy, sell and switch into and out of mutual funds (unit trusts) over short- and long-term periods.
Unfortunately, the results of the QAIB study do not change. Due to impatience, investors earn less – in many cases, much less – than mutual fund performance reports would suggest. For the calendar year 2023, the US equity market was up 26.3%, whereas the average equity investor realised only 20.8%. Over longer time periods, the average investor gap – the difference between what the portfolio returns and what the investor experiences – while still significant, is lower: approximately 3.6% per annum over both 5 and 10 years. Compounding this difference over the long term will make a meaningful contribution to an investor’s ability to retire comfortably.
Over 2023, the US equity market was up 26.3% |
the average equity investor only realised 20.8% |
Interestingly, this impatient behaviour is not unique to end investors. William Green2 makes the compelling point that in 1951, the average holding period of the underlying stocks in US mutual funds was about 6 years. This had reduced to only 1 year by 2000. Vanguard founder, Jack Bogle, warned that “the folly of short-term speculation has replaced the wisdom of long-term investing”. By way of comparison, the average holding period of all the stocks ever owned in the Ninety One Global Franchise Fund is almost 4.6 years, and the average holding period of the current portfolio positions is 8.1 years.
We have previously illustrated the benefits of being patient and staying invested in volatile periods using a ‘Funnel of uncertainty’ chart, which illustrates how the range of return outcomes narrows materially as the investment time horizon extends.
Figure 1: MSCI All Country World Index (ACWI) range of returns
Rolling returns of the ACWI
Source: Morningstar, 1 July 1995 to 30 September 2024. MSCI ACWI NR USD.
You will note that the lowest 1-year return was -48% for the 1 year to 28 February 2009, at the depth of the Global Financial Crisis, whereas the highest return was 58% for the 1 year to 28 February 2010, a range of 1-year return outcomes of an astonishing 106%. However, when considering the lowest and highest 10-year annualised returns, the range has narrowed materially – from a low of 3% per annum to a high of 13% per annum – an all-positive range of return outcomes of only 10%. Over rolling 20-year periods the range of return outcomes reduces further to only 3%. This reinforces the notion that with time/patience comes a greater degree of certainty.
Recently though, I came across a more data-rich way of illustrating investment returns over different time horizons, which we have reproduced for global equities going back to 2001.
Figure 2: MSCI ACWI calendar year annualised forward returns
No. of years forward
2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
1 | -16% | -19% | 34% | 15% | 11% | 21% | 12% | -42% | 35% | 13% | -7% | 16% | 23% | 4% | -2% | 8% | 24% | -9% | 27% | 16% | 19% | -18% | 22% |
2 | -18% | 4% | 24% | 13% | 16% | 16% | -20% | -12% | 23% | 2% | 4% | 19% | 13% | 1% | 3% | 16% | 6% | 7% | 21% | 17% | -2% | 0% | |
3 | -3% | 8% | 20% | 16% | 14% | -8% | -5% | -4% | 12% | 7% | 10% | 14% | 8% | 3% | 9% | 7% | 12% | 10% | 20% | 4% | 6% | ||
4 | 1% | 8% | 20% | 15% | -4% | 1% | -1% | -5% | 13% | 10% | 8% | 10% | 8% | 8% | 4% | 11% | 13% | 12% | 9% | 8% | |||
5 | 3% | 11% | 18% | 0% | 3% | 3% | -2% | -1% | 15% | 9% | 6% | 9% | 11% | 4% | 8% | 12% | 14% | 5% | 12% | ||||
6 | 6% | 11% | 5% | 5% | 5% | 2% | 1% | 2% | 13% | 7% | 6% | 12% | 7% | 8% | 10% | 13% | 8% | 8% | |||||
7 | 7% | 1% | 9% | 6% | 3% | 4% | 4% | 3% | 11% | 7% | 9% | 8% | 10% | 9% | 11% | 8% | 10% | ||||||
8 | -1% | 5% | 9% | 4% | 4% | 6% | 4% | 2% | 10% | 9% | 6% | 11% | 11% | 10% | 7% | 10% | |||||||
9 | 2% | 6% | 7% | 6% | 6% | 6% | 3% | 3% | 12% | 7% | 8% | 11% | 11% | 6% | 8% | ||||||||
10 | 3% | 4% | 8% | 7% | 6% | 5% | 4% | 5% | 9% | 9% | 9% | 12% | 8% | 8% | |||||||||
11 | 2% | 5% | 9% | 7% | 5% | 5% | 5% | 3% | 11% | 9% | 10% | 9% | 9% | ||||||||||
12 | 3% | 7% | 9% | 6% | 6% | 6% | 4% | 5% | 11% | 10% | 7% | 10% | |||||||||||
13 | 5% | 6% | 8% | 6% | 7% | 5% | 6% | 6% | 12% | 8% | 8% | ||||||||||||
14 | 5% | 6% | 8% | 7% | 6% | 7% | 6% | 7% | 9% | 9% | |||||||||||||
15 | 4% | 6% | 9% | 6% | 7% | 7% | 7% | 5% | 10% | ||||||||||||||
16 | 4% | 7% | 8% | 7% | 7% | 8% | 5% | 6% | |||||||||||||||
17 | 5% | 6% | 9% | 8% | 8% | 6% | 6% | ||||||||||||||||
18 | 5% | 7% | 9% | 8% | 6% | 7% | |||||||||||||||||
19 | 6% | 7% | 10% | 7% | 7% | ||||||||||||||||||
20 | 6% | 8% | 8% | 8% | |||||||||||||||||||
21 | 7% | 7% | 9% | ||||||||||||||||||||
22 | 5% | 7% | |||||||||||||||||||||
23 | 6% |
Source: Morningstar, 1 January 2001 to 31 August 2024, MSCI ACWI NR USD.
The chart provides additional useful insights:
During times of market instability, investors must not panic. Rather, they should remain patient and recommit to their long-term investment goals and bear in mind that they are most likely to achieve these by time in the market and not timing the market.
A good financial advisor can help investors to understand their future cash-flow requirements and ensure that investment portfolios are set up correctly to cater for these needs. A correctly structured investment portfolio requires surprisingly little attention during periods of excessive market volatility. However, a further critical role played by good financial advisors is to counsel patience during these not-infrequent periods of uncertainty. We therefore encourage investors to seek professional investment advice, tailored to their individual circumstances.
1 From 2000 to 2018, his flagship hedge fund returned 1 204% versus the S&P 500’s 159%.
2 William Green, Richer, Wiser, Happier, 2022.
The role of living annuities in a pensioner’s retirement income plan continues to spark healthy debate. Over the course of 2024, we have seen the advice industry rethinking issues such as how to manage offshore exposure, address inflation risk and build more flexibility into retirement plans.