Are you feeling a little bit down and out about not seeing the performance you expected or had hoped for in your investment efforts? Here’s a story about numbers to tide you through this waiting period. Whenever you’re in doubt about playing the long game in investing, here’s one thing you can go back to, trust the data.
Data, data, data on the wall: Who’s the winner of them all?
Let’s take a look first at the Morgan Stanley Capital International (MSCI) World Index from 2000-2021.
Table 1: Returns over the period from 2000 to 2021
*Figures from Dimensional Fund Advisors, Matrix Book 2022.
Before we look for the “winners”, here’s a bit of background about the MSCI index. The MSCI is one of many indexes, and this particular index measures the stock market performance of companies in various countries. This includes well-known stocks such as Apple and Amazon, and closer-to-home DBS, UOB, and Singtel. Basically, if you had invested in all these companies, without incurring any fees, you’d get the following returns. This is essentially the performance of the global ‘market’, or what investors call a ‘benchmark’.
How to read the table
Column 1 reflects the current year returns; basically what you would have earned if you had invested in the index for each year.
Column 2 reflects the annualised return, or the annual return, had you stayed invested since day 1 till the year in question.
Column 3 reflects the value of a portfolio of $100,000 from day 1. Basically, how much would you have actually made.
So who’s the winner? Track the returns and you’ll see that the real winner is perhaps the person who had stayed invested for 22 long years. A return of 6% for 22 years is abstract and might seem little, but in actual numbers, this translates to $100,000 growing to $382,000, with the pure effort of simply, waiting. Imagine, what can you do with an additional quarter of a million and some change? I’m sure you would reply, LOTS.
Is waiting too simple, and not relevant for our tumultuous times?
If your first reaction is to dismiss this table and think - this context will never apply again to today’s world, it’s important to note that the world faced some terrible events in these 22 years. 2001 saw the 9/11 terrorist attacks, SARs consumed the world in 2002, Hurricane Katrine in 2005 caused more than $100 billion in damages- the costliest hurricane ever to hit the USA; 2008 delivered the subprime crisis, and Japan’s nuclear disaster happened in 2011. Europe almost got overwhelmed by the Greek Debt Crisis in 2015 and Brexit followed shortly in 2016. To top it all off, the world went into lockdown in 2020 due to Covid-19. To say that those 22 years were uneventful would be a massive understatement. During this period, the US faced its lost decade: one of only two times in stock market history.
Yet despite all that turmoil, returns were very positive after 22 years, and staying invested through the storm returned a good outcome (i.e. $100,000 grew to $382,026.44). But that is not to say the experience was good all the way. In fact, starting in 2000, it would be more than 5 years before your portfolio returned to near its starting point. How many of us would have lost faith in the market by then?
I picked this period because it contained a very long and bleak period - 5 years of waiting. One can only imagine the darkness one might have felt when things did not seem to turn around, even after 4 years!
In fact, if you went through the following 20-year moving periods, you’d see a very comforting picture. This table, also from Dimensional Fund Advisors, measures cumulative returns over the previous 20 years, ending in 2021.
Table 2: 20-year returns across different years
Each 20-year period involved various negative life-changing events, yet, in every case, the markets returned more than double what is put in.
So what can we learn from the data?
What Data Tells Us About the Nature of Markets
1. Markets will provide returns
From Table 2 we can see that the market can and does provide returns. While the returns fluctuate, it is still positive. Based on available data, the returns after 20 and longer years have all been positive. In fact, based on the data set that I have stretching back to 1970, no 20-year period and longer have shown negative returns. The worst years were 4.95%, as reflected by the table above. While it's possible that markets can return negative returns after 20 years, the occurrence of it is likely to be rather low based on historical data, and it has yet to happen.
2. Negative returns often get corrected over time
From Table 1, we see that the annual return is not consistent, and negative annual returns, even negative returns over several years, occur. But over time, these negative impacts are overcome and the portfolio grows.
3. Compounding works
Finally, compounding works. The value grows over the years, as per Table 1, column 4, but it takes time. The market rewards patience and disciplined investors.
I believe in using an evidence-based approach towards investing. Time in the market matters more than timing the market. Another table shows the randomness of returns across countries.
So trust the markets. Trust that if we let the markets work for us, we will do ok. But to survive the market, you need to be able to deal with the downtimes, as disastrous as black swans even. And that means a careful and continual management of the basics of cash flow, insurance and investments.
“If you can meet with Triumph and Disaster and treat those two impostors just the same… Yours is the Earth and everything that's in it”.
Rudyard Kipling, IF.
I write on topics related to financial habits and decisions. Do explore my other articles at https://www.williamseah.com/blog if the ideas intrigue you. Drop me an email at reach.william@gmail.com or text me at 9673 1523 if you’d like to chat over coffee or whisky.