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Long-Term Investors Win

There’s a view among many market participants that the way to profit from the stock market is to be able to nimbly dance in and out of stocks. They’ll invest just before stocks start ticking upwards, and sell just before it crashes down.

That looks great on paper and sounds like a seductive idea. But unfortunately, reality isn’t so neat. In fact, there’s plenty of compelling evidence (see here as well) that point to how the more you trade in and out of stocks, the more you lose.

Thing is, time in the market is an often over-looked advantage that every investor has in their arsenal. Warren Buffett is a special investor; we’ll very likely never get his intellect, his investment savvy, his connections, and the billions of dollars at his disposal. But every investor has one thing in common with Buffett when it comes to the stock market – the choice to stay invested over the long-term.

Problem is, not many have the stomach to withstand market ups and downs. They end up not giving their investments enough time to allow for market corrections to right themselves, or for the magical effects of long-term compounding to come into play.

That’s a real pity. Consider this amazing statistic compiled by Standard & Poor’s corporation and presented by asset management firm Franklin Templeton Investments:

Period of Investment

S&P 500 Average Annual Return for 20-year period ended 31 Dec 2011

Remain fully invested

7.81%

Missed the 10 best days

4.14%

Missed the 20 best days

1.70%

Missed the 30 best days

-0.39%

Source: Franklin Templeton’s website

From the table above, we can see that market participants who’ve missed the 10 best days of the S&P 500 (an American stock market index) ended up with an annual return that’s more than three percentage points lower compared to an investor who remained fully invested through thick and thin.

That’s a massive difference after 20 years of compounding. $1000 invested in the S&P 500 on 31 Dec 1991 would have become $4,500 twenty years later on 31 Dec 2011 at an average annual return of 7.81%. On the other hand, the same $1000 investment that compounds at 4.14% would have become only $2,250. The patient, long-term investor wins.

In Singapore, the benchmark Straits Times Index (SGX: ^STI) has gained 109% from 1466 points at the start of May 1992 to 3,070 points today. That translates into an average annual return of 3.48% over the past 21-plus years. That sort of return is really nothing to rave about, but it’s likely kept pace with inflation (or even exceeded it by a small margin) over the same time period.

What happens though, if a market timer tried to jump in and out of the market and missed the STI’s 10 best days? His returns fall to a paltry 0.12% per year.

We’ve had more than 5,500 trading days from 1 May 1992 till 19 Dec 2013. And if an investor had missed just 10 of the best of all the available trading days, then his returns plummet to nothing.

Of course, some might point to how a market timer would have done tremendously well if he had missed the 10 worst days of the market. But here’s the thing, what are the odds of picking the right days to exit the market and then come back in again at the very next day?

In Singapore, I’ve also found current blue chips with pricing records that go back all the way till the start of 1992.

These shares included the banks Oversea-Chinese Banking Corporation (SGX: O39) and United Overseas-Bank (SGX: U11); newspaper publisher Singapore Press Holdings (SGX: T39); full service carrier Singapore Airlines (SGX: C6L); offshore engineering outfit SembCorp Marine (SGX: S51); real estate developer City Developments (SGX: C09) and the conglomerates Keppel Corporation (SGX: BN4), Jardine Matheson Holdings (SGX: J36) and Jardine Cycle & Carriage (SGX:J36).

And guess what? Investors who’ve held on those shares through hell and high-water over the past 21-plus years (coming to 22 years, to be precise) would have clocked in an average total return (after adjusting for reinvested dividends) of 700%, translating to an average annual return of 9.9%.

Company

2 Jan 1992*

19 Dec 2013

% Change

Jardine Cycle & Carriage

S$2.617

S$34.00

1,199%

United Overseas Bank

S$1.893

S$20.35

975%

Singapore Press Holdings

S$0.38

S$3.99

949%

Keppel Corporation

S$1.110

S$10.73

867%

Oversea-Chinese Banking Corporation

S$1.155

S$9.87

755%

SembCorp Marine

S$0.56

S$4.3

668%

City Development

S$2.035

S$9.5

367%

Singapore Airlines

S$2.711

S$10.03

270%

Jardine Matheson Holdings

US$14.86

US$51.73

248%

Average

700%

*Prices on 2 Jan 1992 are adjusted for dividends, stock splits, rights offerings, and spin-offs

Source: S&P Capital IQ

Looking at the numbers above, I guess it can be said that it’s not timing the market but time in the market that counts.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.