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Long-Term Investing: It's all about outcomes

Header

Some might say potential policy missteps by central banks. Others could point to uneven global growth prospects. But all too often, the investor’s chief problem is likely to be himself. Why?
Most investors are not strictly rational, according to behavioural research. Rather, they are subject to behavioural biases; past experiences, personal beliefs and preferences can influence judgment and skew decisions.



Coupled with the growing prevalence of a short-term mindset, these biases can steer them away from logical, long-term thinking, and deter them from reaching their long-term investment goals.
We studied two common behavioural biases: loss aversion and herd mentality. Our analysis examines their impact on investment returns and considers how long-term investing can help mitigate these biases and produce better investment outcomes. The results make a strong case for long-term investing and that the time to focus on this is now.



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Average stock holding periods have compressed Average stock holding period in the US, by decade

Chart1_V2
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Institutional investors fled as global stocks plunged during the Global Financial Crisis Equity asset allocation across regions

Chart2
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Most investors are loss averse and follow the herd Three loss aversion scenarios

Chart3

For the purpose of this study, we focused on three scenarios: investors with high, moderate and low loss aversion, leading to high, moderate and low trading frequency respectively, and compared them with a buy-and-hold scenario. In our analysis, we assumed that 2.5 times is a fair representation of investor exit and entry points.

 

Loss averse and follow the herd

The notion of 'buy low, sell high' might seem obvious and simple enough, but this oldest investment advice is easier said than done. In fact, the opposite is often truer for most investors. Herd mentality is often observed among investors where they mimic each other's behaviour, especially in times of uncertainty.
Most investors are also loss averse. According to research by Nobel laureate Daniel Kahneman and his late collaborator Amos Tversky, losses hurt about 2-2.5 times more than gains satisfy.

 

Average stock holding periods have compressed Average stock holding period in the US, by decade

Chart1_V2

Institutional investors fled as global stocks plunged during the Global Financial Crisis Equity asset allocation across regions

Chart2

Most investors are loss averse and follow the herd Three loss aversion scenarios

Chart3

For the purpose of this study, we focused on three scenarios: investors with high, moderate and low loss aversion, leading to high, moderate and low trading frequency respectively, and compared them with a buy-and-hold scenario. In our analysis, we assumed that 2.5 times is a fair representation of investor exit and entry points.

 

Loss averse and follow the herd

The notion of 'buy low, sell high' might seem obvious and simple enough, but this oldest investment advice is easier said than done. In fact, the opposite is often truer for most investors. Herd mentality is often observed among investors where they mimic each other's behaviour, especially in times of uncertainty.
Most investors are also loss averse. According to research by Nobel laureate Daniel Kahneman and his late collaborator Amos Tversky, losses hurt about 2-2.5 times more than gains satisfy.

 

Behavioural-biases-970x255-2


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Behavioural biases hinder
the creation of long-term value

The effect of loss aversion and herding on investment means buy-and-hold investors can earn much better returns than those who move in and out of markets. In other words, behavioural biases can hinder the creation of long-term value. Investing for the long haul not only allows investors to take advantage of the power of compounding, but it can also mean saving money on transaction fees and taxes, while offering tax benefits.
And although buying the dips and dollar cost averaging compared favourably to moving in and out of the market, they fared less well than buy-and-hold.
Once investors jump out of the market, the longer they wait to reenter, the more harm they do to themselves. The chart at the bottom of the page shows the market's cumulative return 12, 36 and 60 months after the investors exit.

 

Being and staying invested is what counts

MSCI ACWI1, average rolling 20 years. Hypothetical $100,000 invested from 1970 to 2014 (ending values).
Chart4

Data from published sources calculated internally. All trades include a 0.07% transaction fee. Buy the dips: based on the investor being 50% invested at the start, and buying 10% every time the market falls 5% in a month. Dollar cost averaging: based on the investor having no investments at the start, and evenly ramping up to 100% after 60 months.

  1. MSCI All Country World Index (net dividends reinvested) from 1 January 2001; previously MSCI All Country World Index (gross dividends) from 1 January 1988 and MSCI World Index (net dividends reinvested) from 1 January 1970.

Once investors exit the market, the longer they
stay out, the more harm they do to themselves

MSCI ACWI1 cumulative return
Chart5

Data from published sources calculated internally. All trades include a 0.07% transaction fee.

  1. MSCI All Country World Index (net dividends reinvested) from 1 January 2001; previously MSCI All Country World Index (gross dividends) from 1 January 1988 and MSCI World Index (net dividends reinvested) from 1 January 1970.
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Portfolios designed to reduce downside risk and lower volatility can help prevent investors from being overly irrational.
In addition, having a long-term investment perspective can allow the patient investor to ride out short-term market volatilities and enjoy any potential rebounds.
It helps, therefore, to rely on skilled active managers who are better oriented to achieve greater downside resilience, low volatility and superior long-term investment results.
The New Perspective startegy, one of our flagship strategies, has weathered many different market environments since its launch in1973, protecting on the downside 100% of the time in rolling three-year down markets.

 

Delivering better results with lower volatility

Capital Group New Perspective Composite.
The value of $100,000 invested at launch.

NPF-Chart1

Data as at 31 December 2015. Returns are in US$ terms.

  1. Results shown for the Capital Group New Perspective Composite, from inception at 31 March 1973, are asset-weighted and based on initial weights and monthly returns, and are gross of management fees.
  2. Results shown for the Capital Group New Perspective Composite, from inception at 31 March 1973, are asset-weighted and based on initial weights and monthly returns, and are net of highest management fees.
  3. MSCI ACWI (net dividends reinvested) from 30 September 2011; previously MSCI World (net dividends reinvested).

This information supplements or enhances required or recommended disclosure and presentation provisions of the GIPS® standards, which if not included herein, are available upon request. GIPS is a trademark owned by CFA Institute.

Staying invested for the long term pays off

Capital Group New Perspective strategy, average rolling 20 years.
Hypothetical $100,000 invested from 1970-2014 (ending values).

NPF-Chart3

Past results are not predictive of future results. Based on the representative account of the Capital Group New Perspective strategy. Data from published sources calculated internally. All trades include a 0.07% transaction fee.

Behavioural biases hinder
the creation of long-term value

The effect of loss aversion and herding on investment means buy-and-hold investors can earn much better returns than those who move in and out of markets. In other words, behavioural biases can hinder the creation of long-term value. Investing for the long haul not only allows investors to take advantage of the power of compounding, but it can also mean saving money on transaction fees and taxes, while offering tax benefits.
And although buying the dips and dollar cost averaging compared favourably to moving in and out of the market, they fared less well than buy-and-hold.
Once investors jump out of the market, the longer they wait to reenter, the more harm they do to themselves. The chart at the bottom of the page shows the market's cumulative return 12, 36 and 60 months after the investors exit.

 

Being and staying invested is what counts

MSCI ACWI1, average rolling 20 years. Hypothetical $100,000 invested from 1970 to 2014 (ending values).
Chart4

Data from published sources calculated internally. All trades include a 0.07% transaction fee. Buy the dips: based on the investor being 50% invested at the start, and buying 10% every time the market falls 5% in a month. Dollar cost averaging: based on the investor having no investments at the start, and evenly ramping up to 100% after 60 months.

  1. MSCI All Country World Index (net dividends reinvested) from 1 January 2001; previously MSCI All Country World Index (gross dividends) from 1 January 1988 and MSCI World Index (net dividends reinvested) from 1 January 1970.

Once investors exit the market, the longer they
stay out, the more harm they do to themselves

MSCI ACWI1 cumulative return
Chart5

Data from published sources calculated internally. All trades include a 0.07% transaction fee.

  1. MSCI All Country World Index (net dividends reinvested) from 1 January 2001; previously MSCI All Country World Index (gross dividends) from 1 January 1988 and MSCI World Index (net dividends reinvested) from 1 January 1970.
Portfolios designed to reduce downside risk and lower volatility can help prevent investors from being overly irrational.
In addition, having a long-term investment perspective can allow the patient investor to ride out short-term market volatilities and enjoy any potential rebounds.
It helps, therefore, to rely on skilled active managers who are better oriented to achieve greater downside resilience, low volatility and superior long-term investment results.
The New Perspective startegy, one of our flagship strategies, has weathered many different market environments since its launch in1973, protecting on the downside 100% of the time in rolling three-year down markets.

 

Delivering better results with lower volatility

Capital Group New Perspective Composite.
The value of $100,000 invested at launch.

NPF-Chart1

Data as at 31 December 2015. Returns are in US$ terms.

  1. Results shown for the Capital Group New Perspective Composite, from inception at 31 March 1973, are asset-weighted and based on initial weights and monthly returns, and are gross of management fees.
  2. Results shown for the Capital Group New Perspective Composite, from inception at 31 March 1973, are asset-weighted and based on initial weights and monthly returns, and are net of highest management fees.
  3. MSCI ACWI (net dividends reinvested) from 30 September 2011; previously MSCI World (net dividends reinvested).

This information supplements or enhances required or recommended disclosure and presentation provisions of the GIPS® standards, which if not included herein, are available upon request. GIPS is a trademark owned by CFA Institute.

Staying invested for the long term pays off

Capital Group New Perspective strategy, average rolling 20 years.
Hypothetical $100,000 invested from 1970-2014 (ending values).

NPF-Chart3

Past results are not predictive of future results. Based on the representative account of the Capital Group New Perspective strategy. Data from published sources calculated internally. All trades include a 0.07% transaction fee.

Case-for-long-term-investing-970x260

All information as at 29 February 2016 unless otherwise stated. This communication is intended for advisers and professional investors only, and should not be relied upon by retail investors. Past results are not a guarantee of future results. This information is neither an offer nor a solicitation to buy or sell any securities or to provide any investment service. While Capital Group uses reasonable efforts to obtain information from sources which it believes to be reliable, Capital Group makes no representation or warranty as to the accuracy, reliability or completeness of the information. This communication is not intended to be comprehensive or to provide investment, tax or other advice. It has been prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. The information provided in this communication is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.
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