Time is the most valuable resource
Investors are focused on returns but ignore the role time plays in achieving goals.
Mentioned: iShares S&P 500 ETF (IVV)
Ukraine’s president Volodymyr Zelensky recently made a surprise appearance at the commencement ceremony for Johns Hopkins University’s Class of 2023.
He spoke about the most valuable resource in the world. “Time is the most valuable resource on the planet. Not oil or uranium, not lithium or anything else, but time,” Zelensky told the graduates. “Your time is under your control.”
Zelensky exclaimed that these resources are dwarfed by the value of time. Okay, now time to put your capitalist hat on. If time is the most valuable resource on the plant, how do we capitalise on it? You are not able to buy time. It is not a commodity, and cannot be traded, bartered or exchanged.
Its importance is demonstrated by the role it plays in the time value of money formula. The formula is used to determine the value of an investment in the future. Time is the multiplier that magnifies the impact of compounding. It allows you to take on more risk and grow your investments over the long term.
The role time plays in investing outcomes
Scott Pape famously declared in his book ‘The Barefoot Investor’ that Host Plus’ Index Balanced fund had ‘beaten the pants off most stock pickers’. This declaration led to an influx of over 20,000 members into the fund – dubbed ‘The Scott Pape Effect’. Many of these investors were younger and just starting their investing journey with ‘The Barefoot Investor’. The Barefoot acolytes rolled into a fund with 75% exposure to growth assets, and 25% exposure to defensive assets.
A follower of Pape’s methodology recently posted in a Facebook group querying whether the jump was right, given the amount of time she has left until she retires.
I'm 35 with a healthy super balance and my husband is 30 with a lot less. We are currently with Hostplus.
We are in the indexed balanced option (75% growth 25% defensive) based on the recommendation from the Barefoot investor book due to the low fees.
However, I've read/heard elsewhere in the finance world that if you've got a long time left until retirement you should be in a high growth and almost no defensive investment option.
I've had a chat to Hostplus and based on my risk profile (very high - I understand the market and realise I am invested for a long period of time so will see many fluctuations but seek growth over many years), I should invest in 55% Australian shares and 45% International. The net return for Australian and International shares based on the previous 10 years is 9.72 and 9.82% from their website. Should we stay in indexed balanced or go with the advice from Hostplus? Thoughts?
Let’s look at how time – and risk - can impact your total return outcomes. For the purpose of this example, I am using Morningstar’s asset allocation models. They take into account future expected returns, instead of past performance of funds. This is a more realistic expectation and model for investors to understand expected portfolio growth.
The closest model to the Host Plus fund is the ‘Growth’ model, with 70% in growth assets, and 30% in defensive. My portfolio is closest to the ‘Aggressive model, 90% growth, 10% defensive.
Projected wealth level of $100,000 invested over a decade (in dark blue) and the likely range of outcomes (95% confidence interval)
Over multiple decades, this effect is multiplied.
I am 30 years old with about $105,000 in my superannuation. I’ve assumed that this article represents the zenith of my career and my income stays the same over the next 35 years until retirement. I’ve experienced 3% p.a. inflation and contribute $18,000 across employer and salary sacrifice (post tax). I used our Portfolio Projection tool to know where I’d end up at retirement.
The relationship between time and risk
Time for some homework. Cycle through the time ranges on this chart of the iShares S&P 500 ETF (ASX: IVV). The more time, the clearer the direction of the chart. Smaller peaks, smaller troughs.
On average, we experience a bear market every 3.5 years, that lasts about 10 months. If you look at any rolling 20 year period for the ASX or the US market, there has never been a negative return. Time allows you to take on risk in the form of volatility to create wealth.
The current market
The volatility and uncertainty we’ve experienced recently has shaken a lot of investors and they have pulled back on risk. The ASX Investor Study 2023 shows that 67% of investors prefer guaranteed/stable returns, compared to 54% in 2020. 33% prefer moderate variability or higher variability for higher returns, compared to 46% in 2020.
Although positive returns have been experienced 100% of the time over 20 year rolling periods in the past, this can never be guaranteed in the future. However, investors that have the invaluable resource of time, the rising preference for ‘stable’ returns can be offered by equity markets. Just give it time.
Many of us understand the value of lost time after the pandemic. It brought many of our lives – relationships, careers, life experiences – to a stand still. To many, investing is intrinsically linked to capitalism. However, for most, wealth creation is not about making your bank account look like a phone number. Wealth creation is about goals – experiences, creating value from the time that we all have. The way that you can ‘invest’ in the most valuable resource in the world is by taking on risk. Create wealth through this risk to then ‘reinvest’ in time by being able to spend that wealth on your goals.
