Facts or fear – what will drive you in 2020?

By Nic Andrew

In his book Stocks for the Long Run, Jeremy Siegel stated, “Fear has a greater grasp on human action than does the impressive weight of historical evidence.”

South African 2019 year-end reviews are generally following a very similar script. They discuss the incredibly tough environment of sluggish growth, electricity blackouts, SOE bankruptcies, retrenchments and the lack of fixed investment and arrests. The list is long, well documented and frequently debated around the dinner table.

Sadly, all of these are true, but the constant negative news flow has created an exaggerated or unbalanced negative view that has the risk of undermining your financial wealth and future.

When faced with these headlines, the natural reaction is to do whatever possible to avoid the risks. Indeed, faced with this onslaught of negative soundbites, that is exactly what many South African investors have done. Industry stats show an avalanche of money flowing from more “risky” equity investments into “low risk” cash and fixed income investments.

But when we consider the facts, is this strategy appropriate? Is equity investing dead? None of us know the future, so the best we can work with is reasonable probability. And the most sensible way to assess that, is to examine the historical evidence.

Here are a few facts to digest:
  • Since 1926 (that’s 92 years of data) equities have returned about 7.5% per annum more than inflation while bonds have returned about 2.5% above inflation. This difference is significant (read “life-changing”) when compounded over long periods and even greater when one considers the relative tax-efficiency of equity versus bond investing.

  • This 92-year period is a relatively long period and includes the Great Depression, World War II, the Vietnam and Cold Wars, the Oil Crisis, PW Botha’s Rubicon Speech, Black Monday, the Dotcom collapse, 9/11, the US Subprime crisis and many, many more. It includes extreme periods of boom and depression, war and peace, inflation and deflation and high and low interest rates. In other words, the negative headlines of today are far from unique.

  • These greater returns have come at greater volatility risk. Since the second World War, there have been 12 bear markets where markets have fallen greater than 20% from their highs. These falls have ranged between negative 20% to negative 57% and markets took between 3 months and 3 years to recover.

  • Over one year rolling periods, equities have been positive 75% of the time (or been negative once over 4 years), over 3 years 83% of the time, over 5 years 87% of the time, over 10 years 94% of the time and over 20 years 100% of the time. While equities are much more volatile in the short-term, over time this risk reduces substantially.
In spite of waves of negativity at times, historically the evidence has been clear: the advances in equity markets have been permanent and the declines, despite being emotionally difficult, have been temporary. For long-term investors - those investors whose goals are more than 10 years away - the great real-life financial risk is not volatility but the loss of purchasing power. 

Nick Murray a leading US behavioural investment counsellor wrote in his book Simple Wealth, Inevitable Wealth, “It is the age-old, never-ending emotional battle between fear and faith in the future. No one is asking you not to feel the fear, because there are very few of us who ever actually become immune to that emotion. You have to be who you are, and you have to feel what you feel. You simply have to refuse to act on the feeling.”

Today, investors face much negative news. The important thing to remember as we embark on 2020 is that much of this negative reporting is true but not unique in history. As in the past, the greatest risk for the long-term investor is likely not the risk of owning equities but instead the risk of not owing enough equities.

Wishing you all a prosperous and healthy 2020. Happy investing.