“The average long-term experience in investing is never surprising, but the short-term experience is always surprising.” – Charley Ellis
In client meetings over the past year or so we’ve had many discussions about what it means to be in a “low return” environment. Stocks, bonds, hard assets and absolute return strategies alike have all offered up relatively muted returns in recent years. As we’ve stressed time and time again, it’s important in times like these to take a long-term view and realize that most short-term periods fall somewhere above or below expected averages.
As an example, let’s consider what the stock market* has done over the past 50 years. As the chart below shows, the annualized return from stocks over this period has been right at 7.0%, slightly less than the 8-10% conventional wisdom tells us to expect. But as the chart depicts, if we break the results down into multiple regimes we see that there are extended periods of time over which stocks dramatically outperform their long-term average, as well as extended periods of underperformance. For example, the last 16.3 years has been one of the worst stretches in recorded history with the market only returning 1.7% annualized to investors.
Another interesting way to look at the data is by comparing rolling windows of time of differing lengths. The gray line in the chart below depicts a rolling 1-year return for stocks, as compared to a rolling 3-year return (green line) and rolling 10-year return (black line). Notice that the longer the window of time you’re analyzing, the smoother the results and the narrower the band of expected outcomes. Based on this data we might conclude that any 12-month period of time for stocks might offer up a result somewhere between -50% and +80% - a pretty wide range! However, if we’re talking about any 10-year window of time we can say with a fairly high degree of confidence that stocks are at least likely to be positive and will probably offer up annualized returns in the 0-20% range.
Long-term results will always gravitate towards long-range expected outcomes, but any short-term period of time in the markets could be wildly above or below that average. It’s important to properly manage expectations and to always place short-term investment returns in the context of what is expected over the long-term. Failing to do this can result in emotional decisions at exactly the wrong time. This is why we work hard to achieve true diversification in our portfolios and to smooth out the ride from year to year. By decreasing volatility and increasing the consistency of results in our portfolios we minimize the chance of finding ourselves wildly departed from our long-term targets. We’re not sure what the coming years will bring, but regardless of what the results are over any short period of time it’s important to remember that when it comes to investing you should always look at things through binoculars rather than through a microscope.
*7/1966-12/1987 = S&P 500 Price Return + 2% Assumed Dividend, 1/1988-1/2007 = MSCI All-Country World Index TR, 2/2007-7/2016 = SPDR MSCI ACWI ETF TR
Author David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.
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