"Where to invest $10,000 for two, five, 10 and 20 years"
That was the headline of an article in the Australian Financial Review yesterday.
The author had asked a range of finance types for their views. Which were… broad. How broad? Well the subheading under 'Two years' was: "Play it safe with a term deposit, or consider ASX micro-caps and maybe Judo Bank."
Cash… volatile micro caps… a single stock.
That's a helluva range!
And whether you read it, or not, I'm going to give you my thoughts on what I'd suggest.
But first, we need to define our terms.
See, you can think about 'investing for two years' in two ways.
First, you can be asking 'What assets are likely to do best over the next couple of years?'.
Or, you can be saying 'I have a 2-year investment horizon, and will cash out in October 2026'.
The former is a theoretical question of odds. The latter is real life. Let me explain.
If you ask me to guess which asset will do best over the next 24 months, I could find you a stock I really like. And maybe I'm right and it gains 30%. But maybe I'm wrong, and it falls 30%.
As a parlour game, it'd be a harmless 'prediction'. As part of a diversified portfolio, it might even be a responsible investment.
The latter is, as I said, real life.
If you said 'I've got $10,000… I need to cash out in two years and spend my money on a new car, or as part of a home deposit', then you care, a lot, about the potential upside. But you probably care even more about protecting your downside.
Should you punt that money on a speculative two-year investment?
Of course not.
So the framing of the question matters. Enormously.
But also, I want to talk about predictions for a second.
It is my strong conviction that financial predictions are essentially useless.
Why?
Because the future is inherently unknowable.
Moreover, they rely on two things: the fundamentals of any investment, and the sentiment of market participants. I'll take each in turn.
The fundamentals of an investment relate to the investment asset itself. For cash, it might be its reliability, acceptance and safety, plus its earnings power and the eroding power of inflation. For shares, it'd be the company's business model, brand, balance sheet and profitability.
Those things can be assessed, and an opinion arrived at.
Then there's sentiment. Which means? Essentially, how people feel about the asset, and what they're prepared to pay for it.
In a perfect world, fundamentals would be all that would be required. Investors would review a company, and pay a rational price, based on the company's quality and expected future. But, well, investors are human beings, with very human failings (me included!). We get greedy sometimes. We are fearful at other times. We get overconfident. Or too sceptical.
The best example of this is still the dot com boom of the late 1990s. For a time there, almost any internet-related business was selling for a fortune, because investors had internet mania. And shares in Warren Buffett's company, Berkshire Hathaway, lost 20% in 1999, while the US stock market gained 21%.
The next year? The bubble popped, the NASDAQ fell 36%, and Berkshire gained 27%! (I own shares in Berkshire and I own units in a NASDAQ ETF, for the record.)
For those who prefer pictures, check out this proverbial 1,000 words comparing Berkshire (the blue line) with the NASDAQ (the red line) for three years beginning in October 1999.
What changed? In both cases, 'sentiment'. The businesses were the same. But investors simply went from madly-exuberant to deeply pessimistic on tech stocks, and from 'Buffett is boring' to 'Buffett is the master' on Berkshire.
Those are extreme examples, of course. But they illustrate nicely the role of sentiment in asset prices.
Here's a simple way to think about sentiment: Imagine a company that makes amazing widgets. Sales are through the roof, the company has no debt and lots of cash, and the future looks bright. Those are (some of) their fundamentals – the facts about the business. But then, a rumour spreads that widget demand is about to plummet. Suddenly, investors panic and sell their shares, even though nothing about the company actually changed. That's sentiment – how people feel about an investment.
And then you've got sentiment, writ large, at a market level. I am a huge proponent of investing in shares, which we'll get to, when I answer the AFR's question. For now, though, sticking with sentiment, you probably remember the ASX fell 38% in just over a month when COVID hit in 2020. The market has since recovered all of that fall – and more – but that was cold comfort in March of that year.
That I think shares would – and did – continue to gain value over the long term doesn't matter much if I had invested for two years from March 2018.
Which is… a lot of set up. But it's necessary to explain the considerations. But now to my answer as to how I'd invest over those timeframes: 2, 5, 10 and 20 years.
The bottom line: shares have tended to increase, over the long term. I think that will continue. It's also true that shares have always been volatile, over the short term.
And the shorter the time period you invest for, the more possible it is that you'd be forced to sell at a loss. Still not likely, but possible. And, unless you hate money, you probably want to avoid that!
So to my answer:
If I need to take my money out in two years' time, I'd leave it in the bank, invested in a high interest savings account or term deposit. I know I wouldn't be maximising my upside, but I'm protecting my downside, ensuring I don't end up with less than I started with.
For 5, 10 and 20 years? Shares, hands down. More fully, a diversified portfolio of quality companies, purchased at reasonable prices.
Again, there's no guarantee that I'll make money over any of those timeframes. But the probability is very good, in my view (and based on historical performance). And the long term returns of shares have been excellent. Further, I see no reason for that to change.
And I walk that talk. It's why I invest personally, and run my services at The Motley Fool, with a 5-plus year time horizon. Fundamentals can take time to shine through in share prices, and sentiment can weigh heavily, and unpredictably, in the short term.
The longer your time horizon, the more likely it is that the performance of the assets themselves will assert themselves over sentiment. The trick is not to be forced to sell before that's had time to play out.
My suggestion: invest accordingly.
Fool on!
