Most investors think long term and rightly so!
The common thinking is that as long as you stick around long enough, the drive along the (investing) road will get smoother and smoother, no matter how many bumps are there, and/or how big are the holes, along the way.
Truth is, this is much more than just "common thinking". When it comes to investing in stocks, adopting a long-term investment horizon is a proven recipe for success.
Looking back at the returns of the S&P 500 (NYSEARCA:SPY) index over the past 92 years, from 1929 to 2019 (inclusive), we can see that only 25 (calendar) years, or 27% of the total, ended with negative returns for the broad market.
Source: Charlie Bilello
Nonetheless, even with a 73% success rate (positive returns), it's clear that:
1) While a long-term investment strategy/horizon will always lead investors into stocks, it won't and it can't protect them from severe losses along the way. Not only point-to-point (during a full calendar year: 1929-32, 1937, 1939-41, 1973-4, 2000-02, 2008) but also intra-year, i.e. major corrections that aren't reflected on a point-to-point basis (e.g 1987, 1990, 1997, 1998, 2010, 2011, 2012, 2015, 2018).
2) Without accounting for the risks, average positive returns don't mean much. A positive total return might look good in absolute terms, but it might be bad in relative terms when accounting for the level of risk that was taken in order to achieve this return.
Putting it differently, even if a full calendar year ends with a positive return - it doesn't automatically mean that it was worth it when accounting for the risk.
Breaking down the above (year-by-year) data strengthens or reveals a few more very interesting observations:
1) Stocks rise most of the time. We all know that, of course, but the below chart reveals the extent of it. Investing in stocks (S&P 500 index) for at least 15-year or more is guaranteeing a positive (but, it's important to note, not necessarily good!) return.
2) Over the past 9 decades, 2 ended with annualized negative return (on an absolute basis) and 3 others "only" delivered single-digit annualized positive returns. Only 4 decades - including the one we're currently in - have delivered double-digit annualized positive returns. The common notion that the S&P 500 is returning "over 10%, on average, over the log-run" might be true, but it still very much depends on when exactly the "long-run" falls.
Source: Charlie Bilello
If you now think to yourself "well, a positive return is still a positive return" - you're right technically, but certainly not fundamentally. Allow me to share with you an amazing, full-cycle, calculation that might be a bit unpleasant to those holding onto the above line-of-thinking.
Within the 80-year period from 1929 to 2009, the S&P 500 took three long, interesting trips to nowhere, accounting for 53 of those years (1929-1945, 1959-1982, and 1995-2009), under-performing risk-free Treasury bills, after all, was said and done.
Source: John P. Hussman
Again, in case this wasn't clear: Over no less than 8 decades, Treasury bills (NASDAQ:TLT) have outperformed the S&P 500 index in about 2/3 of the time!!!
From the first chart of this article, we already learned that during these 8 decades, only 24 (calendar) years ended with negative returns. This proves what we've just claimed: Positive return and successful investing aren't necessarily the same thing.
Recording a positive return, for itself, is meaningless when it comes to determining whether that return was high enough to compensate the investor for the risk that was involved in producing it.
Going back to an example that I keep getting back to: Entering a casino with a $100 bill and going out with $1,000,000 doesn't make this 9999% phenomenal return a success story from a risk/reward perspective.
Playing the roulette (or robbing the casino) doesn't turn gambling into a recommended/successful type of "investment". Similarly, investors must always evaluate their portfolios'/investment managers' results on a risk-adjusted basis.
With the S&P 500's forward dividend yield more or less in-line with the yield of the 30-year Treasury bonds, investors find stocks much more attractive than bonds (AGG, LQD, BND, HYG, JNK) - and rightly so.
Nonetheless, dividend yields are only part of the equation, and there are many more risk factors that must be taken into consideration.
Here's John P. Hussman again:
From a pure, value-focused perspective, the only reason to hold equities here is because their risk-adjusted returns appear likely to exceed bond returns and Treasury bill returns at the very longest investment horizons.
Treasury bills outperformed the S&P 500 index two-thirds of the time, over the course of 80 years (!), and they can do so again.
Perhaps not over the next 80 years, but when the 30-year Treasury Note yields only 2.10%, wouldn't even 8 months or 8 years be a shocker?
After all, even the longest journey begins with a single step.
As much as this might come as a big surprise to many, anyone who has been investing in the iShares 20+ Year Treasury Bond ETF or the SPDR S&P 500 ETF (SPY) has seen almost an identical total return, thus far, this year.
Data by YCharts
Call me crazy, but I'm not sure that a long TLT-short SPY position won't be making money going forward. Not an investment suggestion (as of yet), rather thinking out loud...
Here's the current SPY/TLT ratio that we need to beat, before accounting for distributions that may take place along the way. Quite a challenge, I must say.
Data by YCharts
Let's revisit this in 8 weeks and then 8 months, shall we?
After all, even a period of 80 years starts with 8 days, 8 weeks, 8 months, etc.
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