Bill Jamieson: An iMotto - a watched investment never boils
CLEARLY I should lunch more often with Edinburgh’s most attractive and personable stockbroker. Since I told of my encounter with She of the Hazel-Brown Eyes here last week, my email inbox has been inundated with inquiries – including one from Hazel Eyes herself.
This was to remind me of her main message over that lunch at La Bruschetta: the secret of investment joy.
How could I have forgotten, having become a neurotic slave to internet monitoring of the rag-and-bone collection of bonds and investment trusts that make up what passes for my retirement planning?
All manner of websites now make it possible for millions of people to track the daily – even hourly – the ups and downs of their pretensions at wealth. Compounding this has been the relentless spread of PC notebooks, iPads and iPhones. We can now monitor the progress of our investments through the day – from hope through apprehension to misery by lunchtime.
But that’s just the point: it is this constant neurotic checking of the daily friction of the markets that’s making us miserable. The little nest egg surge at 9am is stalling by 9:30am, peaking by 10, trending down by 11 and collapsing on all fronts by 11:30am. One’s hourly moods are dictated by the ebb and swell of this restless financial ocean.
To this, Ms Hazel-Brown Eyes has excellent advice. A keen rambler in the byways of behavioural finance, she believes this obsessive stock-watching lies at the heart of my Miserable Git demeanour. It’s not the portfolio dispositions, it’s the neurotic frequency of checking that’s doing nothing for my mental health. Go out and get a life.
To sledgehammer home this point (and judging by the crowd behaviour in most restaurants these days, it takes a sledgehammer to get us off those iPhone buttons) she sent me a little table from the book Fooled by Randomness by Nassim Nicholas Taleb (he of disaster probability analysis and The Black Swan) that is so good I reprint it here.
The table is called the Probability of Joy and it sets out the chances of a joyful outcome ranked by the frequency of looking at our investments.
It is based on a portfolio giving 15 per cent returns with 10 per cent volatility. It shows very little increase in the probability of joy when we look on a minute-by-minute, hour-by-hour or daily basis. The greatest likelihood of finding happiness is obtained by looking just once a year.
The wisdom of this point was dramatically impressed on me last week when reading the latest Credit Suisse Global Investment Returns Yearbook. I have followed this work, by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School, since its inception 13 years ago. I cannot recommend it highly enough for anyone seeking to understand the long-term drivers of gilt and equity markets worldwide, dating back to 1900. If you cannot get a life, you can at least get the Global Returns Yearbook.
The basic message is familiar: over that long span – 1900 to the present day – a portfolio of shares has performed far better than bonds, bills, housing and gold. The sum of £100 invested in 1900 would have grown to £22,432 in 2011, compared with just £417 in bonds. Even after allowing for inflation, equities have achieved an annualised real return of 5.4 per cent, bonds have returned 1.7 per cent, housing 1 per cent and gold 1.3 per cent.
However, this unambiguous message of “equities über alles” has been challenged of late, with three sharp market sell-offs in the space of a decade and the onset of deep and troubling volatility compared with the three decades to 1970 and the long market uplift running from the early 1980s to 2000. And in any event comparison back to 1900 is meaningless in the real world – who started investing in 1900? Real world investing is over much shorter periods – and the current period has not been good for equities. Or has it?
The key item I take from this is long-range analysis is the critical importance of re-invested income. The after-inflation capital gain on a portfolio of UK equities since 1900 is just 0.5 per cent. The total return with income re-invested is 5.2 per cent – a transformational difference. Over the same period, a high-yield portfolio with income re-invested has outperformed a low-yield portfolio and the UK market index.
Another interesting feature of the Credit Suisse/LBS analysis is a chart on the long-term effect of momentum investing: a portfolio of market “winners” would have risen at an annual rate of 14.1 per cent since 1900 against just 3.5 per cent a year for “losers”.
No study more dramatically illustrates the point that investment is a marathon, not a sprint, and that dividends are the driver of total returns. These are such basic, obvious points they hardly bear repeating.
Yet repeat I must, as today’s neurotic observer, slave to the instant information update, is in danger of missing the wisdom of long-term total return. The gradual uplift from dividends and their assiduous re-investment are not captured on electronic portfolios purely fixated on the movement of share price and capital value alone.
The secret of joyful investment? Don’t keep looking.
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Thursday 23 May 2013
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