Picture: 123RF
Picture: 123RF

It’s normal to question the whole concept of equity investing when stock markets around the world go into free fall. What’s the point of having a large chunk of your life savings exposed to such a volatile asset class, after all?

First, some historical perspective. Only last month Credit Suisse Research Institute published the latest annual instalment of its Global Investment Returns Yearbook.

The document consists of about 48 glossy pages of relatively small print, with a number of interesting conclusions about asset classes, themes and factors, all related to different regions of the world.

Arguably the most important statistic, however, is one that hardly changes over time: if you had invested $1 in the US stock market in 1900 and kept on reinvesting dividends, you would have grown the purchasing power of your money 1,937 times over the ensuing 120 years. This equates to a 6.5% annualised real return (yes, after taking account of inflation).

If you had decided to be a bit more diversified and bought a global equity index rather than committing all your eggs to purely an American basket, your real return would have compounded at a slightly more modest 5.2% over the full 120-year period.

The nub of the matter is that even after the turmoil of the past few weeks, with equities around the world entering bear market territory, these numbers hardly change: a 20% drawdown shaves less than 0.2% from the long-term returns quoted above.

I understand that none of us can realistically afford to have an investment horizon of a century or more, but statistics such as these do serve to underscore the value of equity exposure in building long-term wealth.

The biggest danger to investors’ wealth is never the next correction or bear market, but their own behaviour

It also illustrates the power of compounding — the most powerful force in the universe, Albert Einstein reportedly called it.

It’s useful to stand still at a time like this and reflect on what equity investing really means.

Unless you’re a day trader, buying shares on the stock market should never be seen as a "bet" on the likelihood that the price will go up over any short timeframe. Warren Buffett famously teaches us that we should always think about investing in terms of acquiring a piece of a business for the longer term. And if you were happy to buy any business only a few weeks ago, at a price which presumably represented decent value at the time, why should you pay any attention to what a volatile "Mr Market" may be prepared to pay for your interest on a daily basis when he happens to wake up with a cough a short while later?

Think of it this way: stock markets enable you to invest alongside the founders of the greatest businesses in the world. If you buy into their companies, you effectively get the likes of Bill Gates and Elon Musk, as well as the teams reporting to them, to work for you on a 24/7 basis.

You thus stand to benefit from all their creativity, foresight, hunger, drive, long hours, business acumen and management skills.

None of this changes when there’s a global pandemic; on the contrary, entrepreneurs such as those mentioned are already thinking of prospective solutions and how they could benefit from them.

Just imagine the riches that will accrue to those who manage to roll out the first coronavirus vaccine.

By investing in equities, you back the forces of human endeavour, animal spirits, free markets and entrepreneurship. Over time, this powerful cocktail will always lead to economic growth and positive returns, even if some blips occur along the way.

The biggest danger to investors’ wealth is never the next correction or bear market, but their own behaviour when one of these events inevitably happens. Will they blink at the bottom, sell out at what proves to be exactly the wrong time, and end up suffering the inevitable opportunity cost as a consequence?

It is easy to say things like this when the mood is bullish and equities are trading at or near record highs. But every now and then, our resolve is tested and this point really comes into focus. The past few weeks have clearly been such a time.

The stellar 120-year returns quoted earlier have been achieved over a period that included two world wars, the Great Depression, the assassination of a US president, a major oil crisis, September 11, the global financial crisis, and the Spanish Flu as well as a number of other pandemics.

And of course there have been several booms and busts along the way. But longer-term investors have always been rewarded for their patience.

Why should it be any different this time?

Gouws is chief investment officer at Credo Wealth. He is based in London