I am purposely writing more these days on topics surrounding return expectations because this is that critical time when investors make a lot of mistakes. Beyond managing your wealth, much of our job as your advisor is to talk you through risks and opportunities to help empower your own decision making regarding personal financial decisions. This update is very enlightening and a must-read for all investors if we respect the past as our teacher.
20-Year Stock Market Returns
A big thanks to Steve Blumenthal, of CMG Capital Management Group, for bringing this chart to my attention last week. Take a look at the 20-year returns for the S&P 500 over time. Really look at the lower chart in terms of highs and lows.
I’ll call out a few highlights. First, we see that investing in stock is a good place for your money. We have seen 20-year rolling returns as high as 13%. These are the periods marked that ended in the early 1960’s and then again in late 1999. Good times for sure, I was there. Everyone with big stock portfolios was rich. But there are other long periods where the rolling 20-year return approaches zero, or even slightly below. Today, we are in a bull market that began way back in 2009 with some very strong returns and a market that is trading way up at new all-time highs. But here’s the key that every passive index investor needs to acknowledge: Even after eight years of a bull market with nearly 200% gains off of the lows, the 20-year rolling return for the S&P 500 is still only 4.69%! Remember, we didn’t see a new high in the S&P 500 until well into 2013 dating back to the previous all time high in the year 2000. Thirteen of the last seventeen years were just making up for losses and working toward breakeven. The last four years have been legitimate new gains and real returns leading us to our 4.69% rolling 20-year return. The Nasdaq Composite is even worse. A new all time new high was recorded on July 13thof 2016 from the previous peak in March of 2000. 16 years of making up for losses in other words.
What’s the point?
Today, we don’t really know if the trend of 20-year rolling returns has turned up or is just finishing its long-term move toward the zero line. We all have a guess but none of us knows the answer. When I first saw this chart, I was immediately curious about how we stacked up over the last 20 years. Our history with the All Season strategy is now almost 20 years old, if you can believe that, putting us in a very small group of advisors with a long-term real return history net of all fees.
(Please see our composite performance disclosure for more performance details)
The All Season Strategy, our only strategy with a long enough performance history, has made… 5.69% average annual returns net of all fees compared to the S&P 500’s 4.69% shown above since inception in 1997 (20 years). I was happy to see some outperformance in the aggregate but more importantly; our clients didn’t need to suffer through two bear market loss periods of nearly 50% either. Here’s a picture worth many of my words. The All Season strategy is shown in Red and the S&P 500 is shown in Green:
Now Back to Setting Expectations
Last week our exposure model moved into negative territory for the first time since July of 2016. We have a model reading of -4 out of a scale of +/- 19. Our Net Exposure mandate says that we need to work toward a target cash position of 20% in our equity models. We’re on our way having sold several positions last week that hit stops. Typically, we see a bounce of some sort that fails after 2-3 days, followed by more selling. I would not be surprised to see a 7-10% correction in the next couple months but this is still too early in the cycle for us to see the start of a nasty bear market. That time should be closer to the middle of 2018 if all things continue as they are. In fact, we are still expecting higher all-time highs by year-end and into the first quarter of 2018.
Looking out further with those 20-year goggles firmly in place, we should be open to the idea that returns might need to hit that historic low point of zero before we can really angle strongly back up toward the low teens (looking at 20-year returns – top chart). Practically, that means that sometime in the next three years, we’re going to see a significant bear market in stocks, something that brings prices back by 35-40% if the math works out. But here’s the good news: The buying opportunity that develops out of the bear market will be another one of those generational moments for investors who hope to make double digits average annual returns on that rolling 20-year window. We’re planning on being in that group, just as we were in the 90’s. Obviously, the key between now and then is to keep your capital intact and avoid the next bear. We are laser focused on that agenda now and will give up some upside return voluntarily as our risk management system kicks in.
Side Note on North Korea – Most of what is happening in stocks today around the globe has been in the works for many months, well before all the noise from Trump and Kim. Huge egos with big guns battling over media attention are, however, a bad combo.
More updates coming as conditions warrant.
Our best to everyone,
Sam Jones
