Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 154

In investing, patience is more than a virtue

When was the last time you saw a headline that said something like, “Everything is fine. There is no need to change your portfolio”? This headline wouldn’t generate many site visits.

So, in our pay-per-click world, these articles aren’t published. Instead, depending upon when you opened the paper during the last year, either the next recession was imminent and cash was the only safe investment, or everything was fantastic and anything less than 100% shares was an underweight. In short, investors have been conditioned to expect extreme views. These opinions are not necessarily wrong, but they are perhaps a little inflammatory. Often, ‘doing something’ following a bout of market volatility can be a good way to reduce wealth. As has been attributed to Warren Buffett, “The stock market has a very efficient way of transferring wealth from the impatient to the patient.”

Let’s take a deep breath and ask whether the ‘turmoil’ of the last year has been out of the ordinary.

Is the recent experience normal?

Consider the daily returns for the Australian share market based on the All Ords Accumulation Index. As shown in Chart 1, starting with the current rolling 12-month return to early April 2016 (-9.8%, the orange bar), since 1980 the Australian share market has delivered annual returns between approximately -50% (November 2008, the most precipitous part of the GFC) and +100% (September 1987, the month prior to The Crash of ‘87). History shows that rolling 12-month returns have been worse than the last year just over 11% of the time since 1980. The recent past hasn’t been a great time for investors, but neither is it particularly rare.

Chart 1: Rolling 12-month returns since 1980 for All Ordinaries Accumulation Index


Note: Frequency numbers sum to 100%

Now let’s look at risk: the ‘risk’ (which we define as standard deviation of returns, or volatility) in the past year to early April 2016 was 17.5% p.a. Since 1980 the range has been between 6% and 36% and, similar to the return chart above, about 12% of observations have been worse than experienced in the past year. Again, this is towards the poor end of ‘normal’ outcomes, but not particularly unusual. Chart 2 suggests volatility occurs in two states: less than 20% (the typical situation) or more than 20% (the extreme situation), which can be seen from the relatively high frequency of high volatility outcomes on the right side of the chart.

Chart 2: Annualised standard deviation of returns since 1980 for All Ordinaries Accumulation Index


Frequency numbers sum to 100%

Can volatility predict return?

We can look at the relationship between historical volatility and future returns to determine whether we can use volatility to predict market direction. This table is a comparison of the realised volatility of any single year and the return in the following year (calculated for every day rather than at the end of the month or year).

On this analysis, volatility has no reliable predictive power for future returns, but some general tendencies can be seen:

  • Regardless of the level of volatility (column 1), future returns were positive at least 75% of the time (column 3)
  • Positive years were best (column 4) when preceded by lower volatility
  • Negative years were worst (column 5) when preceded by higher volatility.

This tendency suggests more caution when recent volatility has been higher, but hardly screams that it’s time to throw in the towel. When realised volatility has been between 15% and 20%, returns in the following year still tend to be positive three times as often as they are negative. Pretty good odds! The point is that we just can’t reliably use risk to predict return.

But what about the very long term?

We will now switch to a much longer data series, nearly 150 years of S&P 500 Index returns courtesy of Professor Robert Shiller’s website. This data, in Chart 3, encompasses a huge range of economic environments. Looking at returns shows investing in shares can be a roller coaster ride. The range of rolling 12-month returns is between -67% and +165%, with 80% of these observations falling between -12% and +34%. Interestingly, the so-called Tech Bubble of the late 1990s doesn’t stand out as anything out of the ordinary when seen in such a long history.

Chart 3: S&P 500 Index rolling 12-month total returns since 1871

Now look at the 3, 5, 10 and 20-year rolling returns in Chart 4. It’s clear that the longer the investment horizon, the more predictable the outcome and therefore the greater the surety of achieving wealth creation objectives.

Chart 4: S&P 500 Index total returns since 1871 for different rolling periods

Three-year returns still have a wide range of outcomes but are materially better than 1-year, and 5-year returns are starting to become a little more palatable. By ‘better’, we mean more consistent. Aside from the Great Depression, the occasions where the S&P 500 Index delivered a negative 5-year return were few and brief. By the time we get out to a 20-year holding period, the S&P 500 Index has never had a negative total return. While this sounds like a really long time, it’s actually the investment horizon of an investor in their mid-forties.

Essentially, in the above two S&P 500 Index charts, the green line of 1-year returns is what you experience but the black line is what you could get. The key here is that asset classes need to be given long enough to let the short-term noise wash out and for the long-term risk premium to pay off. The longer an investor can stick to the plan, the better. What’s more, it’s easy to do!

Rules by which to invest

While it’s tempting within a diversified portfolio to sell down equities ‘if they look toppy’ or buy ‘if they are cheap’, that’s speculation, not investing. It’s our firm belief that the strategic asset allocation needs to be set with reference to, and maintained for, a period consistent with the investment horizon of the investor. Material changes should really only be made when there is a change in the circumstances of the investor and the temptation to ‘just do something’ should be resisted. A well-diversified, appropriately positioned portfolio is likely to do the job required of it as long as it is given enough time. Develop an appropriate investment plan and stick to it.

In particular, make use of two powerful tools available to investors:

  • Sometimes referred to as ‘the only free lunch in investing’, appropriate use of diversification improves the surety of investment outcomes.
  • You are saving for your retirement and the investment horizon should match. Recent market returns make for entertaining table talk, but it’s the long term average outcome that determines one’s quality of life in retirement. Asset allocations should be set for the long-run balance between risk and return rather than trying to predict what’s going to happen in the next few months.

One of the fundamental tenets of asset allocation should be: MORE TIME = MORE SURETY

Be the patient investor and let the market transfer money from the impatient to you.

 

Stuart Eliot is Portfolio Manager at BT Investment Management. See more details on BTIM’s Diversified Funds here. This information is for general information only and has been prepared without taking into account any recipient’s personal objectives, financial situation or needs.

 

3 Comments
Bruce Baker
May 05, 2016

The 2 comments above are precisely correct. To put it another way, in a secular bull market, any fool can make money - and buy-and-hold works well, In a secular bear market (as much of the West are non in), and in speculative bubbles (and you could argue that there at least a number of them around at this point in time), buy-and-hold tends to be disastrous. Yes, timing is difficult and error-prone, but there are times when buy-and-hold is a riskier strategy.
[As an aside, does any advisor training these days teach you anything about timing these days? If not it is lacking. I know when I did my Diploma of Financial Planning 20 years ago, they simply taught buy-and-hold .... and not a mention on timing .... except perhaps some discouragement to try. I not sure what proportion of Australian advisors have caught up with this, but at least a sizeable portion of American advisors have been grappling with these tougher timing-related issues because of the behaviour of the US share market from the dot com bubble.

Jerome Lander
May 05, 2016

Relying upon about the second most successful market ever (the US) to demonstrate your point is selection bias at its best.

There are many other markets where returns have been disastrous over long periods of time.

An understanding of the contemporary issues in investment markets would suggest that it is foolish to wholly rely and place your trust in untrustworthy markets and untrustworthy market participants to generate returns. While your average benchmark hugging or index manager might love an ignorant client base to do this so that they retain their assets without having to do much, unfortunately this is a one trick pony. The reality is things are much more complex than that.

Fundie
May 05, 2016

In my opinion, the advice to be “patient” and just “buy & hold” needs a warning – eg Japanese invstors who ‘bought and held’ in any time in the 1980s are still patiently waiting – 30 years later. Likewise anybody who bought the US index in 1929 had to patiently wait until 1954 to get back to square one – etc. History has shown that return outcomes are more about TIMING. Patience (time in the market) is only good if you don’t mind having to wait up to 30-40 years to recover from losses – if you pick the wrong time to buy. Timing is everything.

 

Leave a Comment:

RELATED ARTICLES

4 ASX small caps poised for a big year

Four all-time best charts for every adviser and investor

Why starting points matter

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Latest Updates

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

Economy

Australia's economic report card heading into the polls

Our economy grew by a nominal rate of 7% per annum from 2017 to 2024, but it benefited from the largesse of fiscal and monetary policies, both of which are now fading. We need a new, credible economic growth agenda.

Preference votes matter

If the recent polls are anything to go by, we are headed for a hung parliament at the upcoming federal election. So more than ever, Australians need to give serious consideration to their preference votes.

SMSF strategies

Meg on SMSFs: Tips for the last member standing

It’s common for people as they age to seek more help in running their SMSF if their capacity declines. An alternate director may be a great solution for someone just planning for short-term help in the meantime.

Wilson Asset Management on markets and its new income fund

In this interview, Matthew Haupt from Wilson Asset Management discusses his outloook for the ASX, sectors such as REITs that he likes, and his firm's launch of a new income-oriented listed investment company.  

Planning

‘Life expectancy’ – and why I don’t like the expression

Life expectancy isn't just a number - it's a concept that changes with survival rates over time. This article breaks down how age, survival, and societal factors shape our understanding of life expectancy, especially post-Covid. 

The shine is back on gold, and gold miners

Gold mining stocks outperformed in 2024 and are expected to do well in 2025. At this point in the rally, it's worth considering what has driven gold prices higher and why miners could still have some catching up to do.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.