In a world of social media and mobile, we are becoming more short termist. We are now able to track share prices movements and trade in seconds, while information is available wherever we go. But the fact is, living in the now is nothing new.
Human beings are designed to think in the short term. We live in the here and now, not in some unknown and unpredictable future. According to Barclay’s white paper Cycle of investor emotions, investors struggle to think 12 months ahead let alone 10 years – and that is when markets are calm. Our short-term focus becomes even narrower in times of stress and volatile markets, just when a longer-term perspective is needed.
This short-termism is rife throughout the investment community, among both private and professional investors. The phenomenon was at its most visible at the start of this year. As markets grew increasingly volatile, investors seized on any new snippet of information to reflect and reinforce the negative short-term thinking that dominated sentiment. For example, the oil price was falling fast, and most forecasts were focusing on how low it could go; very few were considering where the price of crude might be in five or 10 years’ time. Part of the reason for this short-term focus lies in the fact that it is much easier to predict and analyse what will happen in the next few days and weeks, but much harder to know what will happen in a couple of years’ time, let alone a decade.
The challenge we face is that investing is not for the short term and rarely for the medium term. The new pension freedoms mean you could be invested for much longer than you ever thought, possibly more than 40 years. Given that timescale, it is important we focus on the long-term benefits of investing, put the short-term volatility into perspective and encourage investors to remain invested during down markets.
The last 20 years have been a thrilling ride; equity markets have been volatile. We saw the exuberance of the dotcom boom, followed by a massive crash as markets realised the excessive valuations were unsustainable. Then a three-year bear market lasting from 2000 to the start of the Iraq war in March 2003. A period of relative stability and recovery followed, only to be shattered by the financial crisis of 2008, and we have been investing in a period volatility ever since.
Given all this volatility, one might be forgiven for only thinking in the here and now. With so many problems that need addressing now, it feels irresponsible for governments, central banks and companies to look beyond the immediate future. Add the fact that the FTSE 100 has largely traded within a range since 1999, many investors could jump to the conclusion that it would have been impossible to make any money from the UK market. However, by focusing on the longer term and investing in the FTSE 100, investors would have made money 95 per cent of the time.
Given all the volatility, one might be forgiven for only thinking in the here and nowSay one analysed the performance of the FTSE 100 over 10-year periods. If you look at every 10-year period since February 1996 on a rolling monthly basis, analysis shows that out of 120 discrete 10-year periods the FTSE 100 delivered a positive return over 10 years on 114 occasions, or 95 per cent of the time. The performance did include dividends being reinvested. Of the six times the analysis showed a negative period, they covered a continuous period with the 10-year period starting between 31 January 1999 and 30 June 1999, not too far off the peak of the dotcom bubble. Perhaps more importantly is the end date: 10 years on, the financial crisis was in full swing, markets were in dire straits and at their lowest levels in over a decade. The only time the FTSE 100 lost money over any 10-year period since 1996 was during the worst months of the financial crisis.
This picture was replicated by Barclays, which looked at the MSCI World Index since 1970. It showed that if an investor held his or her money in the index (before costs) there were no losses, so long as the investment was held for over 12 years, regardless of the purchase date.
However, investors do not take the risk just to break even, they also want a decent return on their investment. Our analysis showed the average return over 10 years was 69.5 per cent or 6.9 per cent a year (with dividends reinvested). So, on average, an investor would have seen decent long term returns before costs.
Clearly investing for the long term works and the longer you can remain invested, the better. Secondly, selling low and buying high is dangerous for your wealth. The study showed time in the market does count, but I would recommend that any investment strategy consider market falls as great opportunities to top up on your favourite investments.
One thing as individuals we have over companies, governments and central banks is our freedom to think longer term. We have no shareholders to answer to, no performance to report, just our own goals and objectives to achieve. If we can focus on that long-term view, all the short-term unpredictable volatility over which you have no control becomes relatively irrelevant. Any investment decision I make is based on when I believe I will need that money, which I hope is in retirement, 20 years or so from now. Looking longer term gives me much greater confidence and clarity when deciding where to invest.
Adrian Lowcock is head of investing of Axa Wealth
| Key points |
Human beings are designed to think in the short term. The last 20 years have been among the most exciting; the stock market has been volatile. Investing over the long-term is more profitable. |
