Category Archives: Investments

Posted on

What a difference a month makes

Time periods can produce a lot of noise

If you are one of those people who assess your investment performance on an annual basis, it is very important to consider the effect that one month can make. Consider which twelve months you are talking about and the impact of moving the yearly period by just one month. Let’s see how that has worked out by comparing the two most recent 12 month periods: one ending at the end of December 2016, and the other ending on January 31, 2017.  It has been widely reported that the S&P 500 total return for 2016 was nearly 12%; however, just by looking at the 12 months ending January 31, 2017, (i.e. from February 1,  2016 until January 31, 2017) the return was 20.04%. That is because in the latter time period, a relatively bad month (January 2016) was dropped from the computation and a relatively good month (January 2017) was added. The variation in return was significant. The point I am making here is that periods as short as one year can create a lot of statistical noise.

What if you have a more broadly based asset allocation, such as the typical “balanced” portfolio that held 60% of its assets in the S&P 500 (SPY) and 40% in the 7-10 Year Treasury (IEF) for all of 2016? The 2016 total return would have been 7.6%.  That same portfolio in the period February 2016 thru January 2017, returned 11.29%.  Still a very wide difference.  Here is the comparison of those two periods along with the same portfolio that was re-balanced quarterly.

Source:  Morningstar Direct, DSNI

So what do you do with this information.  First, take caution when someone tells you that they had a really good or, for that matter, a really bad year. Understand what that means by first considering which twelve months is being addressed. Ask for a longer view.  This phenomenon also points to the sequence risk of returns. In other words, a strong return or sudden loss could have a measurable impact on the accomplishment of your goals when it occurs at the front end of your investment time horizon. This can be seen by looking at various periods that have a common end date.

Since the news reporters like to talk about what has happened since the 2008-09 market bottom, our team thought it would be interesting to look at the performance of the same 40% IEF: 60% SPY portfolio for four time periods all of which end on January 31, 2017, but which begin at different times. See the chart below for the analysis. Do you see how the different times periods could be chosen to support a particular narrative that the reporter is trying to tell?  The stated returns are annual and include dividends. The blue bar shows the annual return had you invested at the 2007 market peak, the gray bar if you had invested at the 2009 market bottom, and the other two periods thrown in for comparison. Once again, the buy-and-hold portfolio is compared to one that was re-balanced every three months.

Source: Morningtar Direct, DSNI

Remember the admonition on every prospectus: “past performance is no guarantee of future returns.”   Due to rather extreme valuations in stocks, that is probably more true today than it has been for many years.

 

Posted on

Moving beyond the irrational

This is a guest post by Mike Wagner, analyst for D. Scott Neal, Inc., written as part of his end-of-day  analysis of markets and securities on January 20, 2017, reflecting on the inauguration of Donald J. Trump as the 45th President of  the United States. Following his astute analysis of the day’s volatility, he wrote to me:

I have ruminated on today’s events for much of the afternoon. I seem to be caught between those who think the world stopped spinning at noon today and those who believe it began spinning again after an eight-year hiatus. Maybe it is an appropriate irony, then, I have so little to say on such a momentous day. It struck me while looking at the day’s volatility how incredible it is that in such a divided country a peaceful transition of power could occur even still. Our financial markets function still; our communications function still; save for a small few who will take absolutely any opportunity to loot and burn, our streets remain free of other-than-usual violence still; in short, the Republic survives.

I think back to my freshman year at the University of Kentucky when, for a history class, I spent the afternoon in Special Collections breathlessly reading and re-reading the 1942 speech H.L. Donovan, then-president of the University, gave in response to America’s entry into the Second World War and the University’s role in the same. He spoke with great eloquence of the sacrifices that victory in that conflict would require, noting that the country had discovered it could not have the flying fortresses, ships, tanks, guns, and other supplies necessary to successfully wage war without giving up many of the comforts and conveniences of everyday life. I wonder what sacrifices might be required for this freedom of ours to continue through what feel to be very troubled times. I wonder also what sacrifices I have ever had to offer for the enjoyment of this democracy, if, indeed, I have offered any. Reading the letter quoted by Senator Schumer during this morning’s inauguration proceedings of one Major Sullivan Ballou to his soon-to-be widow leads me to wonder who indeed loves democracy in its ideal as opposed to loving it only insofar as its abstract supports the particular philosophies to which one may subscribe?

These questions make exceedingly poor market analysis, I grant, but their answers, at present, lend me the same conclusion I have of the market itself on a day like today: I don’t know. No one, of course, knows what the market is going to do. That said, much of the work we do here ultimately rests on the premise that there is a psychology to the market crowd which might be irrational itself but which may be rationed through nonetheless, ultimately giving some sense of clarity. I find myself to be remarkably unclear at the moment, despite the felicity of the Elder signals. So, for tonight, I’ll close with a simple but sincere prayer: God help us.

Posted on

An updated tool in the investment toolbox

The Dr. Elder Impulse System

With volatility on the rise, you may be reminded by many advisors that it is not wise to attempt to time the market, that you should invest solely for the long term.  Modern portfolio theorists are fond of saying, “There isn’t anyone who can accomplish such a feat and do it consistently.” Of course, that’s true. What they don’t say is that consistency, while important, is not the end-all, be-all that it implies.  Yes, we want to win all the time, but that truly is impossible. What is possible is to have a winning ratio of gains to losses and over time, that will suffice. What the advice to stay fully invested all the the time ignores is the need to control downside risk.  Most of us want to avoid the next major downturn. Click below to read more.