The SpaceX IPO has created undeniable excitement, but investors only need tiny daily returns for their portfolio to go stratospheric. Raymond Backreedy, CIO at Sparrows Capital, explains why shouldn’t get too caught up in the hype.
It’s easy to get distracted by the prospect of stratospheric returns from exciting market listings like SpaceX, but investors barely need to leave the ground for interstellar gains over the long term.
In spite of huge spikes following its record-breaking IPO, the Elon Musk-owned company fell 16 per cent in one day after listing, taking it back to $150 dollars a share, exactly where it started less than two weeks prior. Even once it joins the major indices, SpaceX will barely register, because only around 4 per cent of its shares sit in free float, leaving it a tiny fraction of any broad global benchmark.
This typifies why deciding whether to buy or sell a particular share, sector, or region is futile, because even if you purchase at the ‘right’ time, can you sell at the best point too? And keep doing it again and again and again?
Respected research, including S&P’s SPIVA report, illustrates how few active managers can consistently succeed, which is why it makes sense to just target the market’s average daily return of 0.035 per cent.
Removing the guesswork
Yes, you read that right.
Such tiny daily positive returns secured from investing in a passive, globally diversified portfolio can compound to create portfolios that could actually help support retirement goals.
And taking this approach removes the need to guess when to buy or sell SpaceX, or tech, or Europe.
Instead, you accept that well diversified indices will include winners and losers, and that when the winners stop winning, you’ll already have exposure to the losers that are about to thrive.
Zooming right out, the past six years have been incredibly tumultuous for markets, and many investors might have opted to escape markets due to Covid-19, the Ukraine invasion, Silicon Valley Bank’s collapse, Trump tariffs, and the US-Iran tensions.
But trying to avoid that volatility would most likely have been a mistake.
Persistence required
Analysis shows that those who remained invested earned more than 90 per cent across the period between January 2020 to Q1 this year.
That shows that volatility isn’t the enemy, but selling at the wrong moment absolutely is. Those who stayed put through the dot-com crash and 2008 eventually recovered what panic-sellers had crystallised.
Looking even further long-term, a £100,000 investment in 2005 became £470,000 by 2025, just with that daily average return of 0.035 per cent compounding.
But investors can only achieve this if they actually stay the course and invest for the long-term, because over time, the overall market skews to a positive return.
Trying to identify the peaks and nadirs in any market instrument is likely to be futile, because being successful will involve more luck than skill, and luck, much like history, rhymes at best but tends not to repeat.
Of course, a degree of rebalancing is needed occasionally, not least to ensure portfolios remain aligned with their intended level of equity risk. But by maintaining a structured and disciplined approach, the temptation to chase performance or react emotionally during periods of volatility can be reduced.
In that sense, rebalancing is as much behavioural as it is technical. It replaces impulse with order and helps investors stay committed to their strategy when markets inevitably test their resolve.
Essentially, the only way to consistently outperform over the kind of time horizons that investors should be saving for is to go global, choose everything, and remove any ‘bets’ that rely on one specific company, sector, or region being responsible for your portfolio’s returns.
As research by Elroy Dimson, Professor of Finance and Research Director at Cambridge Judge Business School, as well as that of Bessembinder et al illustrates, very few companies in an index actually drive overall returns, with about 97 per cent barely beating cash and approx. 3 per cent giving outsized returns.
Because of the extreme difficulty in knowing which stocks will fall into that smaller cohort and when, investors would have an incredibly low probability of successfully identifying them in a timely manner.
Owning all the companies, however, means you are holding the next unicorn before anyone even knows that’s what it’s going to be, and you capture its entire growth journey.
Raymond Backreedy is CIO at Sparrows Capital
*Bessembinder, H., Chen, T. F., Choi, G., & Wei, K. C. J. (2023). Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks. Financial Analysts Journal, 79(3), 33–63. https://doi.org/10.1080/0015198X.2023.2188870 [1, 2, 3]
