HOT TOPIC | Why patience pays off in long-term investing

In the investment world, timing equates to solving a puzzle, and questions often arise: Is it the right moment to invest, or should one wait for a better opportunity? The truth is that there is always something to worry about – market volatility, economic uncertainties, global tensions. Nevertheless, amidst this constant uncertainty, there is a fundamental principle: equity markets tend to ascend over time.

Imagine, for a moment, the growth of a bamboo tree. At first, it may seem nothing is happening, but belowground roots are spreading and strengthening. Then, suddenly, it shoots up in height. The bamboo tree teaches us that sometimes, achieving greatness requires patience, nurturing, and waiting.

Warren Buffett, one of the most successful investors of all time, sums it up nicely –

"The stock market is a device for transferring money from the impatient to the patient."

A recent study of the South African equity market revealed that, three-quarters of the time, investing a lump sum immediately is more profitable than gradually investing over a year. These mirror a similar study of the S&P 500, which found that investing a lump sum immediately into the US equity market is better 75% of the time than dollar-cost averaging.

But what if you could time the market perfectly, which is nearly impossible? What is the opportunity cost of immediate investment compared to the perfect entry point? And how does it fare against the worst timing or simply staying in cash?

Consider a study by the Schwab Centre for Financial Research that analyses the outcomes of five different long-term investment strategies over 20 years.

• Perfect timing: investing at the lowest point in each calendar year.

• Invest immediately: the first day of each calendar year.

• Cost averaging: at the beginning of each month.

• Bad timing: investing at the highest point in each calendar year.

• Staying in cash.

While 'Perfect timing' yielded the best results, it is not a realistic approach. What is intriguing, though, is how closely the ‘Invest immediately’ strategy follows the ‘Perfect timing’ one, emphasizing the significance of getting invested and benefiting from compounding returns. Even the 'Worst timing’ strategy significantly outperformed 'Staying in cash’. Schwab replicated this study over multiple 20-year periods, consistently showing similar outcomes.

Looking at the South African equity market using FTSE/JSE All Share Index return data from January 2003 to December 2022; we repeated the Schwab study. The results align closely with the global trend. The ‘Invest immediately’ strategy generated an annualized return of 12.5% per annum over the 20 years, outperforming ‘Staying in cash’ by almost 6% per annum.

Source: Morningstar & Ninety One

When making a long-term lump sum investment, remember the wisdom from the bamboo trees. Market timing is elusive, and patience is vitally important. With the guidance of a financial advisor, determine your equity exposure based on your goals and risk tolerance, then invest as soon as you can. Your growth may not be visible at first glance, but, like the bamboo, it will surprise you with its upward trajectory over some time.