The difference between timing the market versus time in the market
Speculation vs. Investing
I have taken inspiration for this month’s comment from an American advisor, Charlie Billelo, whom I follow on various platforms. The charts are his with data sourced from Bloomberg, Y-Charts and his own proprietary research. The detail refers to the S&P 500 index since 1928, but the message would apply equally well to most indexes.
After an eye watering January where we have seen the volatility in global markets spike to levels that are normally seen during crashes, I thought it would be a good idea to touch on the difference between long term investing with the benefit of compounding returns, and speculating where you’re trying to make market calls to boost short term profits, with the risk of getting it wrong!
“Whether you’re excited or nervous when your favourite asset falls in price marks, whether you are investing or merely speculating.” said Naval Ravikant, who is a forward thinking venture capitalist and has also been invested in the crypto market from early on.
It’s fair to ask why anyone would be excited when their investments are moving lower – but it makes sense when you see this as an opportunity to deploy more money into your strategy, or simply to reinvest dividends and interest at lower prices. The longer the time horizon the better your chances are to improve your overall returns.
It’s not to say that short term trading or speculating can’t be profitable. It can be. On the best trading day ever the S&P 500 was up 17% on the day! But to take advantage of that trade you needed to have some luck on your side. Skill minimizes the need for luck but no trader could claim that skill alone led them to enjoy that return.
If you buy a stock and hold it for a day, you may as well put your money on black or red at the casino. You will probably be right 53% of the time. However, if you buy and hold a portfolio for twenty years, you will never yield a negative return over any rolling twenty year period. That is true even for investors who bought the day before the fated 1929 stock market crash and held their portfolio through the Great Depression. Granted twenty years is a long time, but the good news is that the longer you hold a portfolio, the better your odds get of generating a positive return:
We all know the benefits of compounding, the so-called 8th natural wonder, but this chart is also an interesting way to see the effects of compounding. It also explains why Warren Buffet’s wealth has built up as it has!
Of course, there are caveats to what I have said. When I started in the industry, five years was long term. And up until 2014, there hadn’t been a rolling five year return that had been negative on the JSE All Share. But as we innovate and progress, things change more quickly and it becomes more difficult to stay in a long term buy and hold strategy. The S&P 500 is, as its name suggests, an index of 500 stocks (although there are actually 505) meaning that it is widely diversified and the returns would come from different sectors or strategies at different times.
All the major US indexes ran into trouble in January. The fear of rising inflation led to frenetic trading and the selloff encompassed many of the large companies like Apple, Facebook, Netflix and Google, which are heavily weighted in the indexes. The indexes suffered double digit falls, but didn’t quite fall 20% which is when a bear market is considered to have started. So we have to ask, have we reached the bottom of this correction and will it be tickety-boo from here? The Nasdaq is as cheap as it has been in the past two years. But if you look a little further back you will see that it is still more expensive than it was before the 2008 Global Financial Crisis. And the S&P fell 11.91% as the credit crisis started, but rallied to a new high in October and then fell 58.7% as the post crisis recession took hold.
We don’t seem to be facing a recession, interest rates remain low, even though they are expected to rise, and the government balance sheets are loaded with debt after all the stimulus. As John Authers from Bloomberg suggests, “… for this selloff to go much further with the economy expanding we would require an accident as exceptional as the Black Monday crash.”
Is this time different? Maybe, but probably not. We continue to monitor the market data and particularly, the bond market’s response, as it has always been suggested that the bond market is the most efficient. After a month like we have just endured, mainly in the offshore market, but exacerbated here by some strength in the currency, it would be easy to give up, move out of more growth orientated assets and run to the safe haven of cash. If you are a long term investor it would be a mistake – hold onto your hats, and stick with the strategy. If history has shown us anything it’s that it works in the longer term!
Asset Class Returns
The table below represents a rolling year view of the major asset class returns that we track. It offers a view of the asset classes we use to diversify your portfolio.
Speculation vs. Investing
I have taken inspiration for this month’s comment from an American advisor, Charlie Billelo, whom I follow on various platforms. The charts are his with data sourced from Bloomberg, Y-Charts and his own proprietary research. The detail refers to the S&P 500 index since 1928, but the message would apply equally well to most indexes.
After an eye watering January where we have seen the volatility in global markets spike to levels that are normally seen during crashes, I thought it would be a good idea to touch on the difference between long term investing with the benefit of compounding returns, and speculating where you’re trying to make market calls to boost short term profits, with the risk of getting it wrong!
“Whether you’re excited or nervous when your favourite asset falls in price marks, whether you are investing or merely speculating.” said Naval Ravikant, who is a forward thinking venture capitalist and has also been invested in the crypto market from early on.
It’s fair to ask why anyone would be excited when their investments are moving lower – but it makes sense when you see this as an opportunity to deploy more money into your strategy, or simply to reinvest dividends and interest at lower prices. The longer the time horizon the better your chances are to improve your overall returns.
It’s not to say that short term trading or speculating can’t be profitable. It can be. On the best trading day ever the S&P 500 was up 17% on the day! But to take advantage of that trade you needed to have some luck on your side. Skill minimizes the need for luck but no trader could claim that skill alone led them to enjoy that return.
If you buy a stock and hold it for a day, you may as well put your money on black or red at the casino. You will probably be right 53% of the time. However, if you buy and hold a portfolio for twenty years, you will never yield a negative return over any rolling twenty year period. That is true even for investors who bought the day before the fated 1929 stock market crash and held their portfolio through the Great Depression. Granted twenty years is a long time, but the good news is that the longer you hold a portfolio, the better your odds get of generating a positive return:
We all know the benefits of compounding, the so-called 8th natural wonder, but this chart is also an interesting way to see the effects of compounding. It also explains why Warren Buffet’s wealth has built up as it has!
Of course, there are caveats to what I have said. When I started in the industry, five years was long term. And up until 2014, there hadn’t been a rolling five year return that had been negative on the JSE All Share. But as we innovate and progress, things change more quickly and it becomes more difficult to stay in a long term buy and hold strategy. The S&P 500 is, as its name suggests, an index of 500 stocks (although there are actually 505) meaning that it is widely diversified and the returns would come from different sectors or strategies at different times.
All the major US indexes ran into trouble in January. The fear of rising inflation led to frenetic trading and the selloff encompassed many of the large companies like Apple, Facebook, Netflix and Google, which are heavily weighted in the indexes. The indexes suffered double digit falls, but didn’t quite fall 20% which is when a bear market is considered to have started. So we have to ask, have we reached the bottom of this correction and will it be tickety-boo from here? The Nasdaq is as cheap as it has been in the past two years. But if you look a little further back you will see that it is still more expensive than it was before the 2008 Global Financial Crisis. And the S&P fell 11.91% as the credit crisis started, but rallied to a new high in October and then fell 58.7% as the post crisis recession took hold.
We don’t seem to be facing a recession, interest rates remain low, even though they are expected to rise, and the government balance sheets are loaded with debt after all the stimulus. As John Authers from Bloomberg suggests, “… for this selloff to go much further with the economy expanding we would require an accident as exceptional as the Black Monday crash.”
Is this time different? Maybe, but probably not. We continue to monitor the market data and particularly, the bond market’s response, as it has always been suggested that the bond market is the most efficient. After a month like we have just endured, mainly in the offshore market, but exacerbated here by some strength in the currency, it would be easy to give up, move out of more growth orientated assets and run to the safe haven of cash. If you are a long term investor it would be a mistake – hold onto your hats, and stick with the strategy. If history has shown us anything it’s that it works in the longer term!
Asset Class Returns
The table below represents a rolling year view of the major asset class returns that we track. It offers a view of the asset classes we use to diversify your portfolio.