YOU may be accumulating towards retirement or already spending in your retirement years. That your investments reach their planned returns is crucial to ensuring you achieve your goals.
When it comes to equities, there is evidence that in the long run, they always generate positive annualised returns. There is also evidence that it is a futile attempt to try to beat the markets by guessing which stocks, asset classes or markets would do better in certain periods. In the end, this kind of active management would yield worse results. Even most professional investment managers cannot consistently time markets.
As an investor, all you need to do is stay invested and you will get positive returns. But that is really just the first half of the story. The untold other half is that positive returns may not mean enough returns for you.
The accompanying table shows the performance of four portfolios with different asset allocations. Each portfolio is customised according to when an investor may need the money. Generally, the shorter the time you have, the lesser equities you can have. That is because equities need enough time to ride out the short-term volatilities. Bonds are often included in the portfolios to cushion the turbulence so that investors can stay invested and not “bail out” in the short run and thus lose money. The performance of the portfolios is based on monthly rolling returns calculated between January 1990 and January 2023.
Before we look at the data, let me explain three things. What are rolling returns? Why do they tell a more complete story? And why this period between January 1990 and January 2023?
What are rolling returns?
Suppose we want to calculate the monthly five-year rolling returns between January 1990 and January 2023. The first period of these returns would be from January 1990 to December 1994. The second period would be from February 1990 to January 1995, and the last period would be February 2018 to January 2023. Based on this, there were 338 sets of five-year annualised returns. Using the same approach, there were 278 sets of 10-year returns, 218 sets of 15-year returns, 158 sets of 20-year returns, 98 sets of 25-year returns, and 38 sets of 30-year returns, all on an annualised basis.
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Why rolling returns tell a more complete story
Let’s say you are presented with the five-year annualised return of a portfolio between January 2017 and December 2021 and it looks good. But the thing is, unless you are invested in the same period, you will not get the same returns. If you invested in the same portfolio between January 2018 and December 2022, your returns may look very different. Rolling returns give you a truer picture of how an investment has performed.
Why January 1990 to January 2023?
For one, this period is recent and therefore more applicable to investors today. But more importantly, this period contains many volatile market events such as the Dot-Com bust, 2000-2002 bear market, the European crisis, the 2008 Global Financial Crisis as well as the recent pandemic. Including events like these will make the analysis more robust.
What does the data tell us? The good news is, just as we have always known, equities do give positive returns in the long run. Across the portfolios over different time periods, except for one isolated period for the five-year portfolio (which has more bonds than equities), none of the portfolios lost money in any periods over their time horizons. However, positive returns do not mean enough returns. Every portfolio has periods during their investment time horizons where they did not meet the planning returns and the difference can be between 0.1 per cent a year to a whopping 3.6 per cent. But just as the data shows, the longer you stay invested, the higher the probability of meeting your planning returns.
Implications
In all our years of planning and advising clients, we came to realise that there are at least seven things that must be done.
- The first is to not lose money. Thus, you need to ensure that the strategic asset allocation of the portfolios is suitable for you to stay invested for your portfolio’s time horizon. You really should not get out before you need the money.
- Besides having a suitable asset allocation, you need to have strong financial health to stay invested. At the least, ensure that you are comprehensively and adequately insured, have sufficient emergency funds and not have too much debt.
- You need to continuously monitor the instruments used in the portfolios to make sure they behave in the way you expect them to behave to deliver the returns you need.
- It is easy to stay invested when times are good, but during periods of high volatility, like in 2022, you need to fight your fears and not jump out of your investment roller coaster.
- In your planning, use conservative net of fees planning numbers.
- As part of planning, set aside enough reserves at the outset just in case you are invested in a period where the returns are just insufficient.
- Be prepared to adjust your plan in years when returns are insufficient.
In today’s advanced capital markets and with technology, getting access to suitable instruments is easy. Getting positive returns is also not impossible. But whether you will achieve your financial goals remains an unknown. Because getting positive returns versus enough returns are two very different things. If you cannot do the seven things above, work with a trusted adviser who can help you.
The writer is CEO, Providend Ltd, Singapore’s first and probably sole fee-only comprehensive wealth advisory firm. He can be contacted at chris_tan@providend.com
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