How has a buy-and-hold equity strategy worked?

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Equity investors who have followed the buy-and-hold strategy in the US market have lost big money over the last ten years in both nominal and real (after adjusting for inflation) terms.

An investment of $10 000 in the S&P 500 made ten years ago would have been worth $7 843 at the end of January 2009. When taking inflation into account, the $10 000 investment’s buying power is reduced to a mere $6 051.

Over the longer term, however, investors have been rewarded for their patience. The accompanying Graph A shows the nominal and real returns achieved by the S&P 500 Composite Index over various periods ended January 2009.

However, the strong growth experienced in emerging markets over the past number of years up to the middle of 2008 resulted in a totally different scenario for investors in the local stock market. The accompanying Graph B shows the nominal and real returns achieved by the FTSE/JSE All Share Index over the past five, ten, 20 and 30 years. South African investors have experienced strong returns in rand terms, with all periods delivering real returns of over 7% per annum.

But the picture for foreign investors in the South African equity market looks a little different. The accompanying Graph C shows the returns achieved by the FTSE/JSE All Share in US dollar terms. Although investors have enjoyed positive returns in US dollar terms over the five- and ten-year periods, a weakening rand has significantly detracted from performance. Over the five-year period the weakening rand has reduced the annual real return to 3,1% (i.e. a difference of 7,9%) and over the ten-year period to 5,5% (i.e. a difference of 5,6%).

Over the longer term the picture is rather dismal. The real returns achieved by the JSE in US dollar terms are negative, coming in at -0,5% and -0,1% per annum over the 20- and 30-year periods respectively.

No wonder foreign investors tend not to get married to our stock market. If we want to attract long-term foreign investors to our stock market, it is imperative for us to create an environment that is conducive to a stable rand. This includes responsible fiscal and monetary policy, a sound economy and a healthy political climate.

Graph A


Graph B


Graph C



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