Is successful investing taking the long term view just a myth? The holy grail of the investment industry seems to involve telling investors to buy and hold for the long term – taking what is in effect, the “long term view”. While this may make sense on a couple of fronts – give it time to do its thing, markets always go up over time and so on, is this a strategy that actually works for today’s markets?
The Australian stock market has been a tale of two groups
If we take a look at the performance of the Australian stock market, levels are currently where they were 8 years ago, effectively confining many holders of near index exposure flat over the 8 year period. Looking at headline stocks such as BHP, AMP, TLS, RIO and NCM, none of them have truly performed over that time line. BHP Billiton Limited (ASX: BHP) was at its current price, 6 or 7 years ago, as was Telstra Corporation Ltd (ASX: TLS) 10 years ago, as was AMP Limited (ASX: AMP) 10 years ago, and in fact, 8 years ago, AMP was at $10! Rio Tinto Limited (ASX: RIO) is around the same level as it was then, and Newcrest Mining Limited (ASX: NCM) has been hammered from $36 a share, 10 years ago to just $10 now!!
As we all now, trading and investing involves risk – and past performance is no guarantee of future performance. Looking at the horror stories above, lets hope the next decade’s performance is not as dire as the one just passed!
Broadly speaking, the only sector that has really performed over this time frame is the banking sector, all of which are up handsomely, over the period. This has been due to the significant run up in the property market, as well as the low interest rate environment, which has prompted investors to seek yield – something the Australian banking sector has delivered in spades.
And over the shorter term?
Not withstanding the flat-lining and or decline in the named stocks above, throughout that period, there have been tremendous opportunities for shorter term plays both on the long and short side, which have delivered those trading the non-long term view, great profit opportunities.
Take BHP Billiton Limited (ASX: BHP) as an example – one of our favoured trading stocks. Over the decade, the stock has run up from sub $15 to around $47, currently around $34. These moves have presented massive opportunities for locking in and actually banking profits, rather than having unrealised gains/losses sitting in the account doing nothing.
What about the other half of the equation?
It’s one thing having an investment portfolio that has flat-lined, if your standard of living doesn’t suffer. However, is that really the case?
With the headline inflation rate over the same period averaging around 2.7% (note that this does not include some of the big household outgoings like Petrol), things have gotten more expensive.
Let me put this another way – if you compound out the cost of living (2.7%pa higher over 8 years) that is a 23.75% rise in general living expenses over that time frame. In reality, it is probably way more!
What does this mean?
Basically, if your portfolio has flat-lined, in dollar terms, you may be thinking, at least I haven’t gone backward. WRONG!!!!! You have and that has come in the form of cost of living rises. With the cost of living increasing by 23.75% over that time, which in reality is actually more, you are almost 25% worse off.
Think of it this way, that 4000 units of Telstra that you may had 8 years ago, would actually need to be 5000 units, today, in order to buy you the same quality of life. Sadly that probably isn’t the case and many that have taken the long term view on their portfolio holdings, are somewhat disadvantaged.
Two questions you must ask yourself
Firstly, what do you think the cost of living is going to do over the next decade – up or down??
What, for example, what will a coffee cost you? Currently around $4/5 depending on whether you drink Soy milk or want a double shot! What will that be in a decade’s time – maybe around the $8/9 mark? Going out for a coffee for many retirees may become a treat or a luxury – a far cry from the Latte society that we as Australian’s are so famous for.
Secondly, now that you are aware of this, what are you planning on doing about it?
Choosing to do nothing – well unless things change, things are going to get pretty uncomfortable in retirement for so many people – and switching into cash really isn’t an option that is worth considering right now. Alternatively, finding out what else you could be doing, to give you the opportunity and potential to not be worried about rising costs – well I guess that would make a lot of sense – even if only to find out, wouldn’t it?