Investing: why it pays to be in it for the long term


The benefits of investing for the long term are well known. With time, investors are likely to pick up a premium for owning equities relative to holding cash or bonds.  Time helps to turn bad short-term market outcomes into positive long-term outcomes.  In addition, it is expensive to buy and sell investments, incurring tax and transaction costs.  

Yet for all this evidence-based insight, investors still get spooked by the noise and uncertainty that they face in the markets, and try to move their portfolios around. 

Exactly why seems baffling to the experienced evidence-based investor, but the answer lies in the way in which our brains are wired.  We suffer a range of behavioral biases – immediacy, anchoring, loss aversion and overconfidence to name a few – that, referencing Aesop’s fable, tend us towards being hares, rather than tortoises.  These can be extremely costly.  

A 2015 paper revealed that fund investors sacrifice around 2% per year through trying to time when to be in and out of markets and funds.  It also found that investors looking to pick up the value premium (by owning relatively cheaper and less financially robust companies), give most of it up through poor timing. It appears that the tortoise in them rightly seeks out value stocks, but the hare in them wants to get in and out to make more money. 

Why being a tortoise is your best bet

A recent piece of research from Albion Strategic Consulting provides us with a useful insight that clearly demonstrates the challenges of being a hare and the benefits of the patience and doggedness of the tortoise.  It estimates the likely distribution of outcomes for a global 60% equity/40% bond portfolio based on a sample set of data from January 1975 to August 2016*. 

In any one-year period, a 60/40 global balanced portfolio has around a 1/3 chance of suffering a loss of purchasing power.  Enough to make any hare jittery. 

Annual cumulative real performance – the hare’s nightmare

Note: 10,000 simulated 1 year periods using monthly data from the Jan 1975 – Aug 2016 data set.
Source: Albion (2016).

But the benefits of holding firm grow over time. With a ten-year holding period, only a few investment outcomes do not deliver growth in purchasing power.

10-year cumulative real performance – the tortoise nears the line

Source: Albion (2016).

Holding firm is likely to deliver a successful investment outcome for the tortoise, without the activity and ultimate disappointment suffered by the hare. 

‘You may deride my awkward pace, but slow and steady wins the race.’

Robert Lloyds - The Hare and Tortoise, 1757. A Fable.

* Proxy indexes are as follows: 40% global equity = MSCI World Index (net div.); 10% global value = Dimensional Global Large Value Index; 10% global small cap = Dimensional Global Small Index; 40% short-dated, high quality bonds = Dimensional Global Short-Dated Bond Index (hedged GBP), rebalanced annually, no costs deducted, but after inflation.

For more insight into the benefits of long term investing, download Volume 35 of Acuity: Patience is a Virtue.