If there is a single phrase that the financial industry misuses more than any other, it is “long term”.
It’s a bit like deciding to get fit by telling everyone you’ll do more exercise. You feel satisfied, because anything is more than you are currently doing – but you and i both know that “more” isn’t specific enough to be useful when you are trying to reach fitness objectives.
And so our mission today is to tackle the question,
“How long is long term?”
We will start by looking at a few “standard” usages of this phrase. The most common place to encounter a need for defining long term is when looking at your superannuation fund, and the options that it may have for choosing between different investment strategies. However, similar logic sits behind a decision of where to place your funds that are outside of super.
There is quite a bit to cover when looking at this issue, so for the moment, i’m just going to highlight the returns of investments placed in broad baskets of shares or property over the past years and to use this data to ask whether any obvious definition of long term can be identified?
Please remember the Great Disclaimer – Nothing, not a jot, not a single sentence, word or letter within this post or this website is to be considered personal advice. I don’t know who you are (if internet statistics hold true, you are more likely to be an automated “bot” than a human being…) and even if we do know each other, i am actually just shouting this into the wind of the internets’ optical fibre traffic pipes, and can have no way of knowing how each point raised may or may not impact your personal position. Therefore, thou shalt not treat anything here as being personal advice. Thou shalt not act on anything in this site on the assumption it is remotely related to you, your money, your family or your much beloved pets. This is general comment of a very general nature, much like all such commentary by websites, newsletters, journals, and other forms of media distribution.
Having said that, it’s darn good material because you are highly unlikely to be able to find this sort of data easily. i hope it helps just a little bit to bring some sort of relativity to the term “long term investing”.
“Long term” in the sharemarket
A daytrader would think that a week is a very long term investment in the sharemarket. A stockbroker may suggest long term as being the time between reporting periods (6 months?) or based on themes, such as waiting for a shareprice to reflect the inherent present value calculations for the company. That could happen in a week, a month, a year or more. A fund manager may suggest that their Australian equity share fund is most suitable for investors with a time horizon of at least 7 years.
So let’s look at how a 5-7 year time frame works in the sharemarket – locally and globally.
Japanese sharemarket “long term”
We’ll start by using the best example i can think of to illustrate how distorted the concept of “long term” investing can be, and why it is soooo very important that this particular little titbit of financial planning should involve more than a glib 3-second sound byte discussion. Let’s consider the Japanese sharemarket under the assumption that 5 years is a “long term”.
5 years. That’s what many financial people would call long term. However, we know that some are suggesting that a sharemarket investment should be considered appropriate if you have a timeframe of 7 years or more. My charting of international markets isn’t as effective when we go too far back, so let’s look at some charts from the website Market Oracle (the link is shown on the graph captions).
7 years is a bit hard to track down, so let’s look at the same market from a 10 year “long term” perspective.
You can see tht things don’t look any better, even if we take 10 years as being “long term”. The Japanese share and property markets are exactly what many commentators fear that other developed world markets will look like in the future, should deflation take hold. The extent of the impact of deflation in Japan is most apparent when viewed over a longer term again. How about 30 years? Is 30 years “long term?”
Yuk. That is what deflation does, when it grips an economy and the markets in it. 30 years of investing, and things don’t really look too good.
For a more detailed look at the issues Japan is currently facing, spend some time reading through this Bloomberg article, which highlights the difficulties Japan is having in managing one of the world’s largest debt loads.
So how long is “long term”?
International share investing
OK. Japan is obviously a bit of a difficult issue. What if we can the net wider, and look at a mix of most of the major global companies, from most of the major global sharemarkets? Is the picture any clearer?
Note on my chosen benchmark : It’s not so easy to track down a lot of super funds’ returns in chart format, and most sharemarket funds tend to be thematic in one way or another, which can lead to calls of my being biased or anti this or that. So we’ll stick to a basic “index” fund, which has no cleverness about it, other than the natural selection inherent in any process that automatically includes the top companies of a market, and automatically excludes those that cease to fit the bill. In other words, we are removing most of the issues associated with the fact that MLC just happens to offer this particular fund. An “Index” based fund with AMP, Colonial First State or Australian Super is going to show quite similar return characteristics. In this case, we are using the International Shares Index option – which is unhedged. That is, it includes the volatility of the shares themselves, along with the fluctuations in the Australian dollar.
Firstly, we’ll look at the time period for up to 5 years.
Clearly, International Shares considered as a whole, have not displayed better returns over longer time frames. Now we’ll look at a 10 year(ish) time frame.
Is this what you expected? The theory behind “long term investing” is based on a pretty well accepted concept of 7-10 years being “long term”. What is happening here?
International Share Investment less currency volatility
Now we can look at the longer term return if we take away the fluctuations in Australia’s currency. To do this, we look at an “hedged” international shares option. Again, the same notes apply as to the choice of fund. We are using MLC’s fund because it has a long term track record, and it uses a Vanguard Index strategy – which removes manager selection and claims of bias.
Notice the strong change in general direction? Australia’s currency has moved through extreme fluctuations in the years since the dollar was first “floated” (sunk?) many years ago. For international investors, the combination of share price volatility, and currency volatility, has caused enormous uncertainty.
From a portfolio point of view, the diversification across all asset classes should leave room for some to do badly and for others to do well. When an asset class shows awful results in the short and medium term, it can distort expectations considerably.
So, how long is long term?
There are all sorts of measures that we could use – but i’m going to use the MLC Masterkey Superannuation Gold Star Vanguard Australian Share Index option to illustrate the point. This is because many people will see their returns in a super fund format – which usually includes dividends less a small bit of tax less some fees.
Note on my chosen benchmark : As per above, i’ve simply stuck with an “index” option to remove manager selection bias.
Ok. We’ve worked through some disclaimer points. Now let’s look at how a sharemarket superannuation investment option is likely to have looked over the past years.
So how long is long term, we continue to ask? Is it 3, 4 or 5 years?
This gives a bit of perspective of just why most large Australian superannuation funds place a reasonably large chunk of their “long term” money into share based investments. The last 5 years has not been a very rewarding time. The years in between have been full of sovereign debt worries, banking crisis and goodness knows what else. However, it can be seen that the “long term” has played out to be somewhere between 7 and 10 years. This part of the portfolio, at least, seems to be following standard theory.
Australian Property Investment
Property is a difficult investment area to talk about without coming up against inherent bias. Many people see property as a “bullet-proof” investment, based on their subjective experiences with Perth residential property – which has had such a big run up to the 2006 peak that global fund managers are looking for ways to make money when the residential property market follows other developed countries’ trajectories (down). However, in superannuation funds, the term “property” is usually referring to investment in the large property companies listed on the Australian Stock Exchange.
Once Industry Funds became big enough, and had secured enough “locked-in” cashflows (through mandated “award” super contributions as the nominated award fund), they moved heavily into the real property market -bypassing the middle-man, and developing or buying large, blue-chip city-centre properties themselves. This creates a divide between the more liquid, daily-valued listed property options and the less liquid, far less often valued unlisted options. It’s not so easy for me to set my hands on unlisted charts that are relevant to the point at hand, so i’m going to look here at a “standard” listed property option – and will stick with MLC’s Property Securities option, simply for consistency. Unfortunately, property funds based on index strategies are not common so i’m using an actively managed fund.
Remember, some managers will do better or worse than others, so there can always be calls of “bias” against my selection of a particular fund to illustrate. Please keep in mind that we are simply looking at “long term” from the point of view of asset classes – i’m not out to present a tome on investment in its entirety.
Having said all that, let’s now look at the how money in a property securities fund is likely to have been reflected in values over the past years, and seek to identify just what “long term” may mean.
So property has worked over 15 or 20 years but has been a rather tepid place to be over 10 years. Awful over 5 years but great over 3 years. How’s that for a chequered record?
So when we are talking property, how long is “long term”?
We’ve been led astray, Liana
Yes, it is my opinion that much of the discussion on “long term” is just a little bit too trite, and this post is part of my attempt to put a bit more information behind the term than just some randomly selected number of years.
To look at how long “long term” should be, we should think in a totally different paradigm. We should be thinking in terms of market cycles. That is, the various stages that most open markets go through as the ebb and flow of supply and demand do their fundamental thing.
A growth investment that is broadly diversified should be able to provide a reasable return when measured over two consecutive market cycles. In other words, if you invest at a peak then it is unreasonable to try to second-guess the outcome of that investment during that particular cycle. You should think in terms of the time needed to wait until the next peak or trough or whatever.
With a more technical version available here…
And we could look at economic cycles and overlay them with market cycles. In other words, it helps to illustrate why a lot of the economic commentary you hear seems to be so “out of whack” with market realities, and vice-versa.
Of course, it’s quite difficult to pick the precise timing of such broad market cycles but these charts should help to illustrate the underlying concepts.
OK, i hear you howl, how long is a “market cycle” Michael?
Not sure – but you’d have to say it’s at least 5 years, and most likely up to 10 years (Australia’s current dream run of national growth is highly unusual in this regard). That means “long term” should be considered as a minimum of 10 years, and most likely 20.
If you accept my logic then where does that leave you in terms of investment decisions?