Financial Planning & Wealth Management

Consistent, Long-Term Investing

The big news in the last week from a market perspective was that the Bank of England lowered its repo rate by 0.25% to 5%. This is the first of the developed world central banks to lower their repo rate in response to declining inflation.

 

It comes as a bit of a surprise since Jerome Powell, head of the Federal Reserve in the US, kept rates unchanged in their meeting on Tuesday. Central banks of developed countries typically follow the US Fed, so the Bank of England making the first move wasn’t quite expected.

 

And the markets reacted positively. The JSE is currently at all-time highs. I’m fully invested, so I’m smiling. Of course, I would have liked the US Fed to cut too. Their inflation is now just below 3%, and it seems like madness to keep their repo rate above 5%.

 

The next US Fed meeting takes place on 18 September, and the expectation is for a 25bps cut. Let’s see.

 

At this seemingly crucial point in time (since we have been waiting for these cuts for over a year), it is interesting to reflect on the global markets.

 

How have they performed? Not just this year, but through the cycle – this is so important – ‘through the cycle’. You will hear it quite often, and it may be a bit confusing. It’s important to understand what this means.

 

We can’t simply look at an investment when markets are going up. As they say, everyone’s a genius in a bull market.

 

We need to see how the investment performs through good times and bad times (this is the cycle). We are long-term investors after all, so looking at how the investment performed through, say, the Covid crash, the invasion of Ukraine, the spiking inflation, and all past significant events that impact markets.

 

So, let’s look at some charts.

 

The chart below shows the performance of stock markets around the world year to date:

 

 

Chart: Year to date performance by region

Our emerging market peer, Latin America, is down more than 16%. In comparison, the JSE is up 8.7%. The S&P 500 is up just over 13%, but India is leading the charge – up almost 17% for the year.

 

All these charts are adjusted for the currency, and the performances are all measured in rands.

 

Looking back over the past 3 years, investments in Latin America have been terrible. We complain about our own stock market a lot, but we need to be cognizant that we are far better than these emerging market peers.

 

Chart: 3-year performance by region

Not surprisingly, the S&P 500 delivered an annualized rate of just below 16% per year. But India (surprisingly) delivered the best performance at over 19% per year.

 

Going back 5 years, the S&P and India are neck and neck, both in the region of 19% per year. That’s an incredible rate of return, and you would have more than doubled your money over this period. South Africa’s JSE, on the other hand, delivered an annualized rate of 11.55%. Not too shabby. I’d take that.

 

Chart: 5-year performance by region

And then, going back as far as I can (2006), the winner is India, with an annualized return of 15.4%. The US S&P 500 is a close second with an annualized return of 14.8%. South Africa’s JSE generated just under 11% per year.

 

Chart: Performance by region since 2006 

A few observations:

  • In all these periods, the JSE did relatively well compared to all other regions. The return it generated was consistently above 10% per year. We have no reason to complain about this.
  • We never want to have all our eggs in one basket, and having a good mix of local and international exposure in our portfolio would have improved our return.
  • The stock market is unpredictable. Who could have predicted India would have been the best performer over all these periods?
  • We have done consistently better than both our emerging market peers (just not India) and developed markets like the UK.
 

And finally, it’s important to recognize that stock market performance is more than adequate for achieving our financial goals. The stock market is primarily a tool to grow and compound our savings over time. 

 

Many fortunes have been lost by attempting to outperform the market. If you can achieve average returns (a mix of US and local markets would have yielded around 12% per year over the past 18 years) for an extended period, you are outperforming 95% of investors. That’s powerful.

 

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About

 MattFin is a blog that focuses on wealth management, investments, financial markets and investor psychology. I build financial plans and portfolios for families and individuals

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