Don’t look at the value of your portfolio too often

Losses occur in the stock markets with monotonous regularity but so do gains

“In the short run, the market is a voting machine but in the long run, it is a weighing machine”

Benjamin Graham 1894 -1976
British-born American economist, father of value investing and author of The Intelligent Investor

The short-term voting machine delivers the market’s moment-by-moment prices; the weighing machine weighs up the economic returns over time.

If we consider the price of a share as the aggregate view of all investors’ opinions of the future cash flows that a company generates discounted back into today’s money by a discount rate reflecting the perceived risks of the company.

Some will believe that the price is too high and will become sellers of the stock and others will believe that the price does not do the company credit and be buyers of the stock.

The equilibrium price at which buyers and sellers transact is the best estimate of the value of a company at that specific point in time, given the information available. As the release of new information is random, so will the movement of prices be random, in the short-term.

Market movements simply reflect the aggregate impact of new news on the future earnings prospects and risk of all companies that make up the market. The recent news that China’s growth has slowed to a ‘mere’ 7% per annum reduced the earnings outlook for companies around the globe and also dented some investors’ confidence. This is Benjamin Graham’s voting machine.

The weighing machine is the underlying, long-term economic return, which an investor must eventually receive from the market, over time, driven by the interminable power of global capitalism.

A simple way to illustrate normal market falls is set out in the figure below.

BpH Wealth Markets in Perspective

Data: MSCI World Index (net divs.) in GBP, after inflation, from Morningstar © All rights reserved

The chart shows the depth and time that markets, in this case global developed market equities, spend falling and recovering back to a the previous market high.

The blue line shows the growth of £100 over time, despite the frequent periods of being underwater below the previous market high. Note that these returns are after accounting for inflation.

The compound return over the period was a little under 4% per annum, after inflation. That means that £100 invested in 1970 became £533, despite the market crash in 1974, the oil crisis and sky-high inflation of the 1970s, the crashes of 1987 and 1990, the emerging market currency crisis of the late 1990s, the technology boom and bust, 9/11, the credit crisis from 2007 to 2009 and now China’s slowing growth.

That is a remarkable outcome that long-term investors benefited from. This is evidence of the weighing machine at work and evidence that the more frequently you look at your portfolio the more likely you are to see a loss.

If you can’t help yourself from being concerned, you could work your way through this checklist, when markets fall.

If the answer to most of these questions is ‘no’, stop worrying:

  • Do you need access to the money invested today, or even in the next 5 years?
  • Is the market falling a surprise to you?
  • Has capitalism ceased to be a driver of global growth and wealth creation?
  • Is the global economy shrinking?
  • Is it a good thing to sell equities when they have fallen?
  • Do you think that the market will be below where it is today in 10 years’ time?
  • Do ordinary patterns of returns warrant extraordinary actions?

What really matters is whether the value of your assets is still within reasonable expectations.