A Bear Market Full of Bull? 3 Traps - 3 Tips
You heard it here first. The 15 year trailing return for stocks has recently been eclipsed, by, wait for it......bonds. Because of the recent sell off, as of Friday's close the S&P 500's 15 year average return was 4.3%, while the US Aggregate Bond Index was right at 5%. In other words, if we were to be able to go back 15 years, and pick between either stocks or bonds, it would have been one of the few periods in history that is was potentially better to choose bonds.** So call it a bear market, bull market, it doesn't really matter. Either way it’s hard to deny the fact that the last 15 years have been anything but normal.
Bonds ECLIPSE Stocks In 15 Year Trailing Returns
After 15 years of unconventional markets, one would hope things would be settled down. From our viewpoint, that is anything but the case. For one, it's fairly hard to say stocks are cheap. The CAPE (Cyclically Adjusted Price to Earnings ) ratio for the S&P 500 is sitting around 23, which is almost about 7 points over the mean. Bond prices are still at record highs, and the economy is so weak it can hardly spark inflation. Further, many of the brightest minds in the industry are calling for mid single digit equity returns for the next decade. For example, Charles Schwab's long term large-cap stock return projection is only 6.3%.
Keeping those tid bits in mind, it's certainly reasonable to think that the next 15 years will be equally as challenging. And if that's the case, many investors will suffer. Continued volatility and lower than normal returns will have many investors, and their portfolios, in a tizzy.
Of course, not everyone has to suffer. Many investors will do just fine no matter what the next 15 years bring. (Okay accept for the apocalypse thing.) Successful investors are normally highly principled, and will use these fickle markets to their advantage. Indeed, they have a good sense of what to do, and more importantly - what not to do. Beware of these 3 notorious traps:
TRAP 1) Predicting the Future - Statistics show that trying to jump in an out of the market typically does more harm than good. It's very difficult to do, because the investment markets are driven by not just numbers, but behaviors. Successful investors focus on what they can control, such as taxes, fees, cash flows, and portfolio holdings.
TRAP 2) Overpaying - Cost is certainly not everything. But it’s 2016, and we still find investors who are paying hefty fees, charges, and commissions for investments that have terrible long term performance. Successful investors monitor their investments to ensure they're getting a good value.
TRAP 3) Risk Aversion - Being too conservative with a portfolio could cost you huge over the long run. For example, if an investor starts a $100,000 portfolio that compounds annually at 7%, they will have $761,226 in 30 years. However, if that same investor was slightly more aggressive, and averaged 8%, they would end up with $1,006,266.
The Difference 1% can make - Growth From 100k
Okay now 3 Tips to consider:
TIP 1) Have a Plan - Diversification is not a strategy. A strategic approach based on asset allocation is a good place to start. Begin with identifying your risk tolerance and objectives, then back into your allocation based on those measurements. After that, then develop a process as to how and when to buy, hold, and sell.
TIP 2) - Consider Dividends: See below. Need we say more?
Total return for S&P 500 stocks between 1972 & 2010
TIP 3) Consider Small Capitalization Stocks: Again, see below.
Growth of $1 - From 1929 - 2014
In summary, the last 15 years have been undoubtedly bizarre and challenging. The next 15 could be as well. But that doesn't change any of the principals or facts in the aforementioned. Building a solid strategy that will weather the different seasons of investing is crucial to finding success. Make very sure your advisor is giving you solid, unbiased advice. Ideally, they should be a fiduciary. If not, call us. Seriously. - JML
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