Benchmark performance for the calendar year 2011

Patience

In the previous edition of Cognitio (3rd Quarter 2011), SIM commented on some investors losing patience with the low returns generated by equities during 2011 and probably more so over the past three to four years (the annualised return since the peak reached in 2008 is 3.8%).  It is invariably after a painful period for equities that investors often reduce their exposure or abandon them altogether.  This activity often occurs at precisely the wrong time.  Investors should actually feel more confident about the long-term potential of equities after a prolonged period of disappointment.  The chart below shows annualised five-year returns from 1960 to 2011.  Over this period there were a total of 8 five year periods when returns were below the most recent five year annualised returns of 8.8%.  However, during each five year period when returns were below 10%, they were followed by a better five year period (this comes with the normal health warning that past performance is no guarantee of future results).  For example, an annualised return between 1994 and 1998 of 4% was followed by a 17% average annual return from 1999 to 2003.  While we cannot say with any certainty what the next five years will hold, it is likely to be better than the previous five years.  In the shorter term investors may still endure hard times, but low valuations increase the likelihood of higher future returns.

Chart: 5yr total returns for the FTSE/JSE All Share Index

While we have had a tough year, successful investing involves the disciplined and patient execution of a long term strategy, especially when it is an emotionally fraught time.  

With thanks to SIM Unconstrained Capital Partners – from their latest Quarterly News Letter Cognitio