HomeInvestment GuruStraits Times Index Has Never Delivered A Loss With 20-Year Holding Period, But…
June 23, 2018
Straits Times Index Has Never Delivered A Loss With 20-Year Holding Period, But…
SGX Observer received an marketing email from a Singapore licensed investment advisory research provider recently, with the title of ‘This Picture Could Radically Alter Your Fortune’.
Powerful illustration for why long-term investing just makes sense using the Straits Times Index
It described that the picture is a ‘powerful illustration for why long-term investing just makes sense’..
– and this is the picture:
According to the email, it assumed
A holding period of one day means it’s a coin-flip for you when it comes to making a gain.
When your holding period is measured in years, your odds of success goes up—and at the 10-year mark, dramatically.
When we look back in time, the Straits Times Index has never delivered a loss for an investor with a 20-year holding period.
Stocks fall every now and then. It’s just what they do; it doesn’t mean that the system is broken.
The above chart is an incredibly powerful illustration for why long-term investing just makes sense. Short-term pains are the price to pay for long-term gains.
“Time in the market will be your greatest natural advantage,” financial advisor Nick Murray once wrote. We’ve just seen that he’s right.
Sounds like a logical analysis? 🤪
👴🏻 Observer A: Need to hold for 20 years then 0% odds of loss making and therefore long term investing makes sense? I simply put my money in bank account or fixed deposit and I don’t need to wait for 20 years for 0% odds of loss making. We invest with the expectation of better gain, and not because of 0 odds of loss making after 20 years.
🧔🏻 Observer B: He is saying, if you buy stock and the stock price goes down, even if you don’t cut loss, you just need to hold and wait and wait and the share price will eventually back to where it was, and the longest you need to wait would be 20 years.
👵🏻 Observer C: I bought Noble Group in 2010 and 8 years has passed. I strongly believe that share price of Noble Group will come back to where it was in 2010, latest by 2030. Noble’s share price already up more than 150% in 3 days. Hooray!
👴🏻 Observer A: As long as such thinking makes you happier, just like how such chart makes that author happy.
🧔🏻 Observer B: He is telling you not to worry if you buy according to their stock calls but somehow the share price goes down. Their calls are always accurate as long as you can wait for 20 years.
🤷🏼♂️ Observer D: Telling you guys a secret. I’ve visited MBS 20 times as of now, and so far 7 out of my 20 visits ended with small gain. I recently realised that, for 5 out of that 7 winning days, I actually ……… wore red underwear! and guess what? I didn’t wear red for the 13 visits that I loss money.
👵🏻 Observer C: Damm it. No wonder I visited 10 times and loss money all the 10 times. I don’t even have red underwear!
🧔🏻 Observer B: 😮
👴🏻 Observer A: 😮
🤷🏼♂️ Observer D: Thank you for proving me right!
🧔🏻 Observer B: 😮
👴🏻 Observer A: 😮
🤷🏼♂️ Observer D: Telling you guys a bigger secret. I’ve recently imported a batch of red underwear from China and in the progress of setting up an e-shop on Lazada to sell it 🤑 …. and the biggest secret is that….. I will not wear red to MBS from now on, until I finish selling this batch, so that there won’t be any chance of me proving myself wrong 😎
🧔🏻 Observer B: 😡
👴🏻 Observer A: 🤬
👵🏻 Observer C: 🔪
Long term investing makes sense, but not this illustration.
S&P 500 Index
There was a published research on historical probability on investment returns vs investment holding period using the S&P 500 index of past 90 years.
According to wikipedia, the index began tracking a small number of stocks in 1923, and 3 years later in 1926, the index expanded to 90 stocks and then in 1957 it expanded to tracking of 500 stocks in 1957.
The index started from 100 in 1923. On August 12, 1982, the index closed at 102.42. On May 30, 2007, it closed at its first all-time closing high of 1,530.23. Its closed at 2,754.88 yesterday.
With such 90+ years of data, the research found out that the longer an investor has held onto the S&P 500, the lower his odds of losing money. For a 10 years holding period, chances of losing money is only 6%, versus 27% chance of losing money if the holding period of 1 year.
The Straits Times Index
So for the Singapore version, the ‘analyst’ plugged the 23 years of the Straits Times Index from 1992 May to 2016 Jan to create the chart that could ‘radically alter fortune’.
The key difference?
The earlier research uses 90 years of S&P 500 data to showcase the odds of losing money for a 10 years holding period. i.e. using 80 out of the 90 years data to showcase the chance of losing for a 10 years holding period.
This analyst uses 23 years of STI data to highlight the odds of losing money for a 20 years holding period. i.e. using 23 years of data to conclude 49% of chance of losing for the holding period of 1 day, but using only 3 years of data to concluded 0% of chance of losing for the holding period of 20 years.
Analysts do not use small dataset to justify huge assumption. Speculators / Marketers use extreme case to attract eyeballs.
Do you recall seeing facebook posts by investment gurus showcasing the performance of their students?
“student A attended my class applied the knowledge I taught and made XYZ profit today.”
While you get impressed by someone who “made XYZ profit” using “knowledge he taught” by “attending his class”, do you question “out of your hundreds of students, only student A made such profit? and therefore worth mentioning?”
The key missing point?
The earlier research was done using historical data of S&P 500 index. The analyst uses historical data of Straits Times Index.
S&P 500 Index and Straits Times Index represent the investment portfolios made up of the shares of 500 and 30 companies listed in US and Singapore respectively. The underlying 500 and 30 companies are typically the biggest (plus fulfilling other criteria) listed companies. These companies are not fixed but changed regularly. The weightage represented by each of the companies varies from day to day.
Investment portfolio can not be represented with single stock.Such investment portfolio does not represent 'All Investments'.
So… please do not expect that your holdings of Noble Group shares will return your full investment capital by waiting for another 13 years, and do not assume the same theory is applicable to whatsoever investment products.
SGX Observer’s Take
If such picture had indeed ‘radically altered the author’s fortune’, I bet his fortune would be extremely volatile.
This analyst doesn’t represent “all analysts”, so please do not conclude it with ‘That’s why I never believe what analysts said’.