What is the long term when it comes to investing? It seems everyone has their own idea about this. For instance if you caught this article today it would appear that 9 years is long enough.
The problem with assumptions like this, are that it ignores the very real impact that vicious market cycles have on portfolios. The author should have stepped further back and provided all readers with a more comprehensive performance overview for longer market cycles. Doing so would portray a more accurate story for those who have weathered multiple market cycles -t hose returns tell a different story.
Let’s look at some recent, well know, cycles and their returns for the periods:
- Market Low – High (Jan 2003 – Dec 2007) = 12.78%
- Market Low – Low (Jan 2003 – Dec 2008) = 2.29%
- Market Low – High – Low – High (Jan 2003 – Dec 2016) = 9.09%
- Market High – Low – High – Low – High (Jan 2000 – Dec 2016) = 4.47%
When you review the S&P 500 over multiple cycles, investors can see a range of performance, and these ranges are far more important to know and understand when constructing portfolios, managing risk, discussing goals and saving.
However, I’ve still not addressed the question – “What is Long Term”? I believe we should we do a better job at defining long-term when it comes to investing. “Long-term” gets thrown around by professionals and pundits as if it’s some magical place in the distant future, akin to a novelist’s – “Happily Ever After.” Referred to as some abstract port on the high seas of investing, marked by the perpetually pointing sign which reads “this way”.
A destination painted to provide investors with comfort and peace of mind. I get it! I do, I was an adviser, and sometimes, depending on the market cycle the only card to play was “long-term.” As if it trumped every client emotion and economic hiccup.
“Everything will be okay in – long term – just ignore the immediate short-term erratic market fluctuations that transpire and everything will be okay.”
However, is this really the best advice and strategy for long-term success? After all investors have big goals, retirement being one, and investors worry and fret about arriving on-time and intact. Also, isn’t long-term, comprised of a lot of short term market cycles? If so, why shouldn’t we take pause to be concerned about the potential impact of these short- term cycles on long term performance?
When SQR looked back at rolling 65 year periods, over 145 years of market returns, we discovered that the Average Inflation Adjusted Compound Annual Growth Rate = 6.77%
At SQR, we are taking a stab at defining long term. What is Long-term to us? 65 years! Why, because it just makes intuitive sense when it comes to the individual investor. Why? Assume today that you are an eager 20-year-old saver with his eye not only on retirement, age 65, but through retirement. Which honestly, is the prudent way to think. Let’s say you live 20 years after retirement age. So today, we have a 20-year-old concerned with squirreling away enough to last until the ripe old age of 85 (which is 6.3 years longer than the average age of death). That’s 65 years of saving, investing, growing, preserving and spending.
What can he or she expect? What do real inflation adjusted returns look like over those periods of time? Glad you asked – insert well timed chart for impact.
When SQR looked back at rolling 65 year periods, over 145 years of market returns, we discovered that the Average Inflation Adjusted Compound Annual Growth Rate = 6.77% over any rolling 65 year period. Keep in mind this ignores things like, taxes, trading costs, investment expenses and advisory fees. It also assumes 100% exposure to US equities (S&P 500), and does not account for diversifying into international stocks as well as other asset classes like bonds and cash – the latter giving up performance for drag so as to layer in stability, safety and lower volatility.
Considering this, it appears that it would be beneficial to have real candid conversations with investors about saving, risk and return for their 65 year plan. It also opens the conversation to having discussion about alternative strategies, like Tactical, which SQR provides for investment professionals. Tactical, like all alternative styles, may enhance risk adjusted returns by adapting to market risks and trends – favoring high beta in bull markets and low beta in bear markets – to capture above average returns.
How well can a good tactical strategy perform. We backtested Spectrum CORE, a Smart Indexing model, over a few of the same cycles mentioned earlier in this article, and here is what the CAGR looks like.
- Market Low – High (Jan 2003 – Dec 2007) = 27.7% CAGR
- Market Low – Low (Jan 2003 – Dec 2008) = 22.4% CAGR
- Market Low – High – Low – High (Jan 2003 – Dec 2016) = 15.9% CAGR
Smart Indexing can be a valuable component for investor portfolios and should strongly be considered.
How do you start? It starts with having great conversations, even the difficult ones. Defining the long-term and exploring alternative strategies, like Smart Indexing for helping investors meet their goals.
Be well –
At SQR, we provide Smart Indexing models, for Investment Professionals (IP’s), that can be implemented for up to 95% less than traditional outsourced channels. Our mission is to provide solutions which address the primary struggles of portfolio management – position, profit, and preservation of capital.
We take a quantitative approach to selecting markets, constructing models and managing risk. SQR’s models are index focused, systematically driven and rooted in a trend following philosophy – adapting to market risks and trends.
Our goal is to eliminate opinion, bias, and emotion from the investment process – to deliver returns which, over cycles, consistently beat the market. Each Smart Indexing model is designed for growth of capital in bull markets and preservation of capital in bear markets.