The Relationship Between Time and Investment Returns – the Fruit Tree Analogy Patrick Fogarty*
One of the most important concepts to understand when it comes to investing is the relationship that exists between time and return. Investing is an inherently risky business, we all know this, but what is less commonly understood is how the chances of having a negative return diminish through time if one has a disciplined strategy. Despite this notion being well supported by evidence, communicating the importance of this relationship can be challenging. People have a natural tendency to look for opportunities, to spot patterns, and to believe that the defining characteristic of a ‘good investor’ is someone who can predict what will happen ahead of time and capitalise on it. This, on the surface, feels intuitive. Partly because for years this has been the dominant investing narrative to which we have been exposed, but also because the idea is
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inherently exciting. The allure of the professional investor, beating the odds and outwitting the market can’t be understated. Although exciting, investors who approach the markets with this mindset, more often than not, destroy value, rather than create it. This is borne out in countless academic studies and industry performance tables. Yet despite the weight of evidence, to quote the late Alexander Pope: “Hope Springs Eternal”. Data provided by SPIVA helps us to understand this by looking at the performance of over 10,000 actively managed investment funds, comparing their performance against the markets that they are paid to beat. In every fund category listed, over a ten-year period, the percentage of managers failing to beat the market exceeds 80%. The common question we hear, following the consumption of data like this, is: “Does that mean we have to settle for market returns?”. This question cuts at the central theme of this article and exposes the main idea we seek to clarify,
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