Long-term Investments

designbythink 2017, Quarter 4 Newsletter 2017

Long-term Investments

‘Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.’

– Paul Samuelson

Paul Samuelson was a Nobel Prize winner and Professor of Economics at Harvard University. Paul makes the critical point that investing is about the return you achieve over the long term; what happens in the short term is often just a distraction and ‘noise’.

The chart below shows the returns of the major market indices for periods of up to seven years to 30 June 2017. It demonstrates the difference between short-term noise and long-term returns.

As soon as you focus on the 7-year periods, the returns from all the asset classes, and in particular local and global equities and property, are much better.

Inevitably there will be times when even long-term returns are poor. Such events are difficult to predict accurately, but the Board of the Fund has appointed investment managers who focus on preserving your money over the long term.

Some impatient investors are tempted by excitement to time the market.
That means they sell equities when they think the market will fall, with the hope of buying them back later at a much lower price. However, research shows that it is very difficult to consistently and accurately predict the future course of investment markets.
For this reason it is generally better to:

  • maintain a long-term investment horizon
  • hold a well-diversified portfolio
  • ignore the noise and excitement that the market routinely provides.

DON’T TRY AND TIME THE MARKET

The dangers of trying to time the market are demonstrated in the table on the left. The table shows the annualised performance of the main asset classes in the USA for the 20-year period 1996 to 2015, compared to the estimated return earned by the average US unit trust investor.

Remarkably, the average investor did worse than every asset class shown and even earned less than inflation.

The reasons for this very poor outcome will include manager under-performance compared to market indices after deducting fees. However, a significant component is due to human behaviour, whether it be in the form of a naïve belief in their ability to time the market, or simply fear and greed.

how have your investments performed?

The Fund has invested your money in a mix of asset classes (e.g. local and global equities, bonds) and the risk profile depends on how close you are to retirement.

The chart below shows the performance of the three portfolios that make up the ‘Life Stage Model’ compared to inflation for periods to 30 September 2017.

Over periods of five years and longer the portfolio returns are well above inflation, especially for the Growth Portfolio where most of the members’ money is invested.