You Can’t Always Get What You Want?
Is the market not giving you what you want lately? Join the club. For the two years period ending in April, a 60/40 portfolio of world stocks and 5 year Treasuries is up a paltry 1.23%. That’s before costs and taxes. You’re portfolio is in the exact same place it was in early 2014. Sure, you’re long-term investor, but who has time to wait on a market like this?
When evaluating past returns of a 60/40 portfolio, it’s easy to view multi-year time periods as dots on a piece of paper. Sometimes we forget that, in the moment, 1, 2, or 5 years is a very long time. Investment managers like to look at 10 and 20-year time horizons for analysis. They often forget to consider the investor experience along the way. A child born at the beginning of the so-called “lost decade” was in the 4th grade before the S&P 500 return was positive in his lifetime. Think of all the milestones that happened between birth and 4th grade long division!
If the past two years has you down in the dumps, consider these other statistics about past market returns. Times like these are not uncommon. In fact, two years isn’t really that long of a time period for the market to be unforgiving. Let’s look at rolling six year periods of a 60/40 portfolio comprised of the S&P500 Index and the 5 Year Treasury bond.
Since 1926, there have been 1013 rolling six-year time periods. The average annual return over the past 90 years was 8.59%. Not bad for 60/40. During 38 of the 1013 rolling six-year periods, the 60/40 portfolio had negative returns. In 71 periods, or 7.01% of the time, returns were less than 2% per year. This is before investment expenses and taxes. In 98 time periods, 9.67% of the time, returns were below 3% per year. If low returns leave you wanting more, rest assured today is not outside the norm for past market behavior.
What about a globally diversified portfolio? After all, most investors today own a broader universe of stocks than the S&P 500 Index. The MSCI All Country World Index began tracking global stocks in 1988. There have been 269 six-year time periods since then. In 4 time periods, the 60/40 global portfolio had a negative return. In 43 time periods, 15.99% of the time, a global 60/40 portfolio returned less than 2% per year. By the way, the average return of the global portfolio was 7.33% per year.
Lackluster returns are not a new phenomenon. If markets were predictable, returns would be lower. Once you take the risk out the equation, you can’t expect to earn a high return. Even though investing is extremely frustrating at times, even for what seems a long time, remain in your seat. As a means of possibly reducing the likelihood of a down year, investors always have the option of forgoing stocks completely. That brings a portfolio’s expected return to the level provided by bonds and it likely means the investor has to save a much larger percentage of her earnings if she want to retire comfortably. However, as shown above, over six-year periods, remaining exposed to stocks generated respectable returns.
Mick Jagger and Keith Richards tried to tell us in 1969, that You Can’t Always Get What You Want, at least not exactly when you want it.
