Investors rewarded for going the distance
By Mark Brighouse, Chief Investment Officer
07 July, 2017
Warren Buffett often says that we should only buy shares that we would be happy to hold if the market were to shut for the next ten years. This has always been a useful test when choosing an investment. Am I confident enough in the investment to not look at it again for ten years and to not care what the price does in the meantime?
Well, people who signed up to KiwiSaver in 2007 have now had a ten year timeframe. If they hadn't opened a newspaper or turned on the TV over the past decade, they would have avoided an enormous amount of angst about market turmoil. Not only that, they could now be looking at their balances, feeling good about their progress and mistakenly concluding that it must have been a pretty dull old time in the markets for the past ten years.
What they would have missed is the Global Financial Crisis, or GFC, which caused sharemarkets to halve in value, numerous housing markets around the world to collapse and left many people financially ruined. The first events of the GFC were actually unfolding only a month after KiwiSaver launched in July 2007. French bank BNP Paribas froze three of their funds that held sub-prime loan exposure in what was the first move by a major bank to acknowledge the rising risk of such investments.
That led to much debate in the early years of KiwiSaver about whether growth-oriented funds were a good idea. Everyone knew that a long term investment plan should include a considerable weighting toward shares, but as prices fell more conservative funds were doing so much better. An investor who ignored all this short term turmoil and focused on their long term goals would have enjoyed the stronger returns from share markets that followed from 2009 as you can see in the following table.
|Share market index||Total returns
30/06/07 to 09/03/09
10/03/09 to 30/06/17
|NZX50 Index of NZ Shares||-41.7%||+208.3%|
|S&P 500 Index of US Shares||-53.1%||+326.5%|
Who would have thought that a retirement saving scheme that kicked off just ahead of the GFC would end up delivering success for so many people ten years later? Much of this is due to a triumph of the long term over the short term. The chart below of the S&P 500 Index clearly illustrates the journey KiwiSaver investors have been on and ultimately profited from.
Any KiwiSaver members who heeded Buffett's advice and were able to pretend the market was closed for the decade and ignored any short term news would have stuck with their strategy and kept on contributing; this is what would have led to the balances they are seeing now.
This type of investor would also have missed a host of other distractions in addition to the GFC including: a plunge in commodity prices, deflation in China, tension in the Eurozone, negative interest rates, the UK's Brexit vote and, of course, the US election of Donald Trump.
Every single one of these events came with dire predictions about the end of the world as we know it and could easily have prompted a KiwiSaver investor to abandon their saving plan. But as we stated earlier, sticking with a strategy you will be happy to hold for ten years, regardless of what the price of the investment does during that time, is a good way to ensure that you don't get distracted by the news.