Investment lessons from ninety years of data

History reveals several volatility spikes in the markets over time — each with specific characteristics that made them similar, despite occurring at different points in time or for various reasons. “One of the most surprising risks that come with a crisis is not the market, but how investors behave,” says Graham Tucker, Portfolio Manager at MacroSolutions.

“We’ve seen this time again and again, that during a crisis, investors essentially go into survival mode. They lose sight of what we are trying to achieve, and their focus starts to narrow. They’re more interested in how the crisis plays out in the short term when we should be doing the complete opposite.”

According to Tucker, by analysing long-term data, it’s possible to identify simple investment lessons that help investors keep the big picture in mind. “While these are well-known principles, in times of crisis, we tend to forget them. However, it is precisely during these tough times that we need these lessons the most,” he says.

Tucker shares eight simple lessons to help every investor build a more resilient portfolio, even amid widespread uncertainty.

1. Inflation is your enemy

Many investors suffer from “inflation illusion”, as they don’t notice how destructive inflation can be over time. However, inflation is still the biggest enemy of savers as it erodes their spending power. Tucker says its important to look at long-term investment returns in “real” terms, stripping out the impact of inflation.

2. Time is your friend

The main reason investors prefer cash to equities is the fear of losing money. The best way to manage the risk of losing money is to remain invested in equities for longer. When it comes to the past performance of SA equities, our research reveals that as soon as you extend your holding period for more than three years, the likelihood of losing money becomes negligible.

3. You need equities

Many investors will not retire with enough money. Investors need higher long-term returns from equities to grow their wealth. This is particularly important in a world in which people are living for longer.

Using average returns over the past 90 years, our research shows it will take an investor 10 years to double their money if they invested in equities and 86 years if they invested in cash.

4. Cash is trash

A bank deposit exposes you to minimise risk, but there’s a price to be paid for that security. Cash does not significantly increase your real wealth over time. Over 90 years, cash has an after-inflation return of less than 1% a year. It is better to own shares in the bank than to leave your money there.

5. Compounding is a powerful wealth generator

Money needs time to benefit from the full potential of compounding growth. Start saving as soon as you can, leave it for as long as you can, and let compounding do the work for you. Choose to reinvest your dividends when appropriate to maximise your growth.

6. The high price of missing out

Short-term volatility can often lead to investors selling their investments at the worst time; it actually costs you more if you exit the market prematurely.

Sitting on the sidelines and missing those good days can be detrimental to your savings. The only thing you can control is having a well-considered plan and ensuring that you stick to it. It is the best way of improving the likelihood of achieving your intended portfolio performance.

7. Diversification is the one free lunch in investments; use it.

Equities may have been the best performing asset class since 1930, but cash was the best performer for 11 of those 90 years and listed property for nine years. 

After time in the market, diversification is the second most valuable tool you can employ to manage risk, as it reduces the impact that a single poorly performing asset has on your overall portfolio. To this end, it is vitally important to ensure that your portfolio is optimally diversified across asset classes to reduce the chance of large drawdowns and, ultimately, enhance the portfolio’s resilience to overall volatility.

8. Active allocation adds value

It’s important to remember that asset classes have distinct secular or long-term periods of under and outperformance.  An expanding investment universe creates an opportunity for active managers to add value by managing portfolios across asset classes, which can be a vital tool in delivering superior returns on a risk-adjusted basis.