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

Equity investors who followed a buy-and-hold strategy in the US market have lost significant amounts of money over the last 10 years in both nominal terms and real terms after adjusting for inflation.

According to Dr Prieur du Plessis (pictured), Plexus group chairman, a $10 000 investment made 10 years ago in the S&P 500, the market index containing the stocks of 500 large-cap corporations, was worth $7 843 on 31 January 2009. “When taking inflation into account, the $10 000 investment’s buying power is reduced even further to $6 051,” says Du Plessis.

Investors in the S&P 500 are rewarded for their patience over a longer term. The same investment over the past 20 and 30 years would have produced real returns of 4,8% and 6,3% respectively by 31 January 2009.

South African investors in the local stock market have fared better than offshore investors. “Due to the strong growth in emerging markets over recent years up to mid-2008, South African investors have experienced strong returns in rand terms, with all periods up to 31 January 2009, delivering real returns exceeding 7% per annum,” says Du Plessis.

The picture for foreign investors in the South African equity market looks somewhat different. “Although investors have enjoyed positive returns in US dollar terms over a five- and 10-year period, the weakening rand has significantly detracted from performance,” says Du Plessis. Over the past five years the weakening rand has reduced the annual real return to 3,1% (i.e. a difference of 7,9%) and over 10 years to 5,5% (i.e. a difference of 5,6%).

Over longer periods 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.

“It is little wonder foreign investors tend not to marry our stock market,” says Du Plessis. “To attract long-term foreign investors to our stock market, it is imperative for South Africa 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.”