Just like football coaches, investors need a long term perspective

Ian de Lange of Seed Investments writes that the South African 2010 soccer world cup is over and congratulations Spain. With four years before all other teams are given the opportunity again for the coveted trophy, all future football teams need to take a long term perspective. It is no different with investing.

Bill Gates is reported to have quoted, "We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction."

The past 3 year performance for local equities has been dismal – essentially flat at 0,25% per annum over this period. With that type of return, or lack thereof, it is only natural that investors question the feasibility of investing into equities, despite the fact that longer run numbers paint an improved picture, with the 5 year compounded return at 16,25% and that over 10 years at 16,37%.

To extend Bill Gates quote to investing, investors tend to extrapolate both superior and poor recent performance into the future. Having suffered 0% in the market when cash returned almost 10% per annum, it’s natural that investors will underestimate the “change that will occur over the next 10 years.”

We will continue to advocate the fact that an investor’s exposure to any investment asset should be increased or decreased depending on the valuation, but another factor that hinders long run results is a myopic perspective.

Daily market price movement and attendant increased activity tends to exaggerate investors taking a shorter term perspective. One way to gain perspective is to take a step back and view an investment portfolio on a regular, but less infrequent period than day by day or even month by month.

The chart below is of the JSE All Share index, but on a quarter by quarter basis.

Despite the 37% decline in 2002/2003 and the 46% decline in 2008, the less frequent time does tend to smooth out the volatility. Investors over a 10 year period to the end of June in this index would have received 16,25% per annum, almost double that of cash.

This hopefully provides just one view of the importance of having a definite longer term perspective to investing into an asset class that has a long term investment horizon.