Ulysses and the Sirens

by | Dec 1, 2018

Ulysses and the Sirens is a 1909 oil painting by Herbert James Draper. It depicts an episode in the epic poem, Odyssey, by Homer in which Ulysses (Odysseus) is tormented by the voices of Sirens. They sang an enchanting song that normally caused passing sailors to steer toward the rocks, only to hit them and sink. All of the sailors had their ears plugged up with beeswax, except for Ulysses, who was tied to the mast as he wanted to hear the song. He told his sailors not to untie him as it would only make him want to drown himself.

Forward to 2018 and not much has changed. Replace Ulysses with the astute investor, the sailors with his/her trusted advisors and the Sirens with news clips (or neighbours). Hitting the rocks in this instance would be changing your investment strategy during the storm. We’ve seen this movie before during the global financial crisis of 2007 to 2009, the bear market of 2002 and 2003 (following the 9/11 terrorist attacks in New York) and the Asian crisis of the late 90’s to name but a few. And every time the patient and disciplined investor came through with flying colours.

In our role as trusted advisor, it may be useful to explain why investors should not do anything drastic in times of market downturn. First of all, every bull market (up to the most recent one) has been followed by a bear market. So don’t act surprised – it happens. Secondly, bear markets are typically much shorter than bull markets. In the third instance, stick with your strategy.

If you had the discipline to only look at your portfolio on 31 December every year since 1995, you would have experienced negative performance in four calendar years: 1996, 1997, 2002 and 2008. Under the assumption that you had at least a three-year time horizon and the discipline to remain invested, you would have enjoyed the following outcomes (returns in excess of a year are not annualised):

Calendar year FTSE/JSE ALSI (total return) Return in subsequent two years Total return over three years
1996 -7% 61% 50%
1997 -6% 71% 61%
2002 -8% 46% 34%
2008 -23% 57% 21%


The danger, of course, is that a nervous investor changes tack at exactly the wrong point. Moving to cash (from growth assets such as equities) at the end of any of these four years would have been disastrous if you consider the stellar performance of the two years that followed.

So where are markets compared to their history?  We’ve analysed the five-year rolling performance of equities and balanced funds since 1994 and compared it to the five-year rolling inflation rate over the same period. The graph below shows that balanced funds and SA equities have only underperformed inflation (over rolling five years) twice since 1994 (and have come pretty close in October 2018):

It’s important to notice how quickly the returns over five years picked up from these lows. The seasoned (or well-advised) investor will know that now is the time to sit on your hands and ignore the sweet voices of the Sirens luring you to the rocks.

Another way to view the current state of affairs is to consider where current equity market returns over various rolling periods are. The chart below shows the current one-, two-, three-, four-, five-, seven- and 10-year annualised performance of local equities against its own history over the same rolling periods:

It’s not quite as bad as it’s been before, except for over ten years where this is pretty much the lowest return over any rolling ten-year period since 1994.

Can markets go any lower? Possibly.

Are they more likely to surprise on the upside from this point on? Quite likely, if historical trends are anything to go by.

So buckle up, take good advice and enjoy the ride. It’s what Ulysses would urge you to do.


Source: Morningstar, Analytics Consulting.