Most humans are not very good at investing. We have too many deep-seated emotional and psychological preferences and quirks which are constantly ready to lead us astray. We hate taking losses so we sit on our losers. We fall in love with our stocks so we don’t harvest our winners. We remember stock prices from the past (“Nortel is a $100 stock!”). We don’t accept that things change, and we often focus on the wrong things. It is not surprising that the great majority of individual investors do worse than both the stock indicies and the securities in which they invest. Recent research shows that mutual fund investors consistently get returns that are only about half that earned by the funds they own, because they trade in and out of their funds and systematically buy high and sell low. Most investors in stocks have similar dismal results.
One of the great mistakes that investors make is in thinking about time. We live in a 24/7 world of breaking news, hot stories and constant interruption. We are bombarded with inputs from our phones, our televisions and our social media feeds. Everything in our lives tells us to hurry up, to decide now, to act at once. All of this helps make us worse investors, because good investing is not at all about acting quickly. Investing is not a sprint; it is a marathon.
We meet with our clients regularly, and when we do we look at the returns on their portfolios. For clients who have been with us a long time, it is striking to see the effect that compounding over a number of years has on portfolio growth. Here is a chart that shows the returns (after all fees and expenses) earned by the portfolios of three clients who have been with us continuously for the last fourteen years. Each of the clients has an asset mix of about 2/3rds equities and 1/3 fixed income, and in each case, there have been no significant deposits or withdrawals over the fourteen year period.
|Year||Client 1||Client 2||Client 3||Median|
|Compounded annual return||8.20%||9.80%||9.50%||9.20%|
Looking at the figures it is hard to see much pattern. The results are good some years, mediocre in others and horrible in one. The fourteen years covers two market disasters: the “Dot Com” crash of 2001/02 and the financial crisis of 2008/09. It includes two roaring bull markets, from 2003 to 2006 in Canada and from 2009 to 2013 in the US. Our minds, which love to find patterns, cannot easily make sense of these numbers. However, when we use the numbers to create a graph, the returns come into focus.
Over time, the value of the portfolio rises. Not in a straight line, not without some bumps and one significant reversal, but over time, in the right direction. Which, after all, is the point of the exercise. To make money, over time. Not in every single year, although that would be nice too, not certainly in every month. But over a long period of time, to achieve a solid rate of return. To complete the marathon, not win the 100 yard dash.