Distractions

 By Guest Blogger Doug Rowat

There’s a great Murray Head pop song from the 1980s called One Night In Bangkok. It’s actually about a chess tournament, interestingly. But more specifically, it’s about not letting an incredibly distracting city like Bangkok interfere with one’s focus on winning the tournament. And, as the song details, it ain’t easy: “It’s a drag, it’s a bore, it’s really such a pity, to be looking at the board, not looking at the city.”

Investing is similar. Distractions abound, but keeping focused on the financial “game”, particularly over the long term, is the most important task. Think of all the headline events that occurred just last year that could have easily diverted your attention: oil plunging to US$27/barrel, Brexit, Donald Trump, the list goes on. Any one of these events might have prompted you to make a poor move such as exiting the market and going to cash. In other words, short-term distractions would have cost you significant upside gain.

Aside from a tendency to get easily distracted, another interesting truth about investor behaviour is that investors often feel that the world events that they’re encountering right now are the most significant and consequential in all of history. This is pure vanity.

The Cuban missile crisis, the JFK assassination and the escalation of the Vietnam War in the 1960s; the energy crisis, massive US trade deficits and a 10%+ US unemployment rate in the 1970s; a US recession, the attempted assassination of Ronald Reagan and Black Monday in the 1980s; the Gulf War, another US recession, the Asian financial crisis and Y2K in the 1990s; the ‘tech wreck’, 9/11, two more recessions (one massive) and corporate accounting scandals of the 2000s—all of these events weren’t significant? This is to say nothing of the Great Depression, World Wars and atomic bomb drops in even earlier decades. Yet despite all this turmoil, the market advanced and long-term investors made money.

Our current situation is not particularly special. In fact, we’re fortunate that no major countries are at war, capital markets are doing well and the global economy is actually quite stable. While risk is always present, it’s really no more severe than it’s been in the past. We just feel that our brand of uncertainty is the worst that the world has ever seen and we make investment errors as a result. In short, we succumb to the distractions.

I frequently refer clients to the rolling 10-year performance chart of the S&P 500. Rolling returns look at overlapping time periods and give a much better sense of historical performance versus a simple average return or a return over fixed dates. Rolling returns give a useful picture of the likelihood of making a profit over the long term, regardless of when you invest. Indeed, the chart below shows that, with the exception of only six or seven brief periods, you could have invested at almost any moment in modern history and made a theoretical profit if you’d stayed invested for at least 10 years.

I’ve highlighted before—as has Warren Buffett recently—that it could all end one day in a huge ball of fire. But there’s no way to anticipate such a catastrophic event and no portfolio in the world would protect you anyways. Until then, what we’re left to deal with are relatively minor crises—Donald Trump being perhaps history’s most recent example. But these crises don’t derail markets for long. History proves this. Why would you allow yourself to become distracted by the doom-and-gloom highlighted every night on the news and elect not to participate in what is almost certain to be long-term market upside?

S&P 500 Rolling 10-yr returns (%): Odds of Doing Well Long-Term are High

Source: Bloomberg, cumulative returns

But you might say, after gazing at the above chart, “what if I’d bought at one of those unlucky moments and then spent the next 10 years making nothing?” Yeah well, tough. This is capital market investing and sometimes you just don’t get lucky with your timing. But the overwhelming odds support the notion that you’ll make money with equities over the long term and equities are therefore an essential component of a balanced portfolio. Further, what is the likelihood that you would have entered the market with your entire net worth during one of these few unlucky periods and then subsequently contributed nothing else to your portfolio for 10 years? Regular contributions and disciplined rebalancing further reduce the likelihood of a negative historical return.

But if strong positive odds of making a profit aren’t enough for you, then, to paraphrase Murray Head, go back to your bonds, your savings accounts and your GICs because the strategies we use would not excite you.

Ignore distractions and focus on what matters: building and remaining invested in a balanced and globally diversified portfolio. Think sensibly, don’t get emotional. Get your kicks above the waistline, sunshine.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.