More Money Is Lost Waiting For Corrections Than in Them

We have data for 91 calendar years (or 1,092 months) of U.S. investment returns over the period 1927 through 2016. The average monthly return to the S&P 500 has been 0.95%, and the average quarterly return was 3.0%. With that background, here’s a short, four-question quiz: If we remove the returns from the best 91 months (an average of just one month a year and 8.5% of the entire period), what is the average return of the remaining 1,001 months? What is the average return of those best-performing 91 months? If we remove the returns of the best-performing 91 quarters…

The Uncommon Average

The US stock market has delivered an average annual return of around 10% since 1926.[1] But short-term results may vary, and in any given period stock returns can be positive, negative, or flat. When setting expectations, it’s helpful to see the range of outcomes experienced by investors historically. For example, how often have the stock market’s annual returns actually aligned with its long-term average? Exhibit 1 shows calendar year returns for the S&P 500 Index since 1926. The shaded band marks the historical average of 10%, plus or minus 2 percentage points. The S&P 500 had a return within this…

Lessons for the Next Crisis

Over the coming weeks and months, as other anniversaries of major crisis-related events pass (for example, 10 years since the bank run on Northern Rock or 10 years since the collapse of Lehman Brothers), there will likely be a steady stream of retrospectives on what happened as well as opinions on how the environment today may be similar or different from the period leading up to the crisis. It is difficult to draw useful conclusions based on such observations; financial markets have a habit of behaving unpredictably in the short run. There are, however, important lessons that investors might be…

INDEXING VS. EVIDENCE-BASED INVESTING

Many investors realize that an evidence-based investment approach offers many benefits when compared with an active investment approach. Evidence-based investing involves buying and holding market components, whereas an active investor or fund manager tries to pick the next winning stock or time where the market is headed next. An evidence-based approach offers these major benefits: By holding entire market components, the investor maximizes the benefits of diversification. By “tilting” the portfolio to riskier or less risky components, the investor can expect to capture the highest market return given his or her risk tolerance. The investor maintains control over his or…

Market Gurus Mostly Strike Out….Again

Larry Swedroe At the start of each year, I compile a list of predictions that gurus have made for the upcoming year, along with some items I frequently hear from investors—sort of a consensus of “sure things.” I keep track of these sure things with a review at the end of each quarter. With the turn of the calendar, it’s time for our midyear review of 2017’s list. As is our practice, I’ll give a score of +1 for a forecast that came true, a score of -1 for one that was wrong and a 0 for one that was…

The Broccoli and Pizza Portfolio

For some of us, it’s hard to give up on the idea that investing should be exciting. Picking stocks can be fun, after all, and there’s nothing like getting your timing right and bragging about it later with friends. For all the accumulated wisdom about asset allocation, risk, diversification, and discipline, some people seem bound to see investing as an end in itself rather than a means to an end. For these folks, picking stocks is a hobby. They follow the gurus and soak up the financial media. Despite evidence to the contrary, they’re convinced they can build a consistently…

Building an Evidence-Based Investment Plan

“Control what you can control.” —David Butler, co-CEO, Dimensional Fund Advisors By following the above five words from Butler, investors can help simplify their complex financial lives. Out of thousands of pages of scientific research, a cornerstone of evidence-based investing emerges: Control what you can control. Control the fees you pay and your trading costs. Control your tax efficiency and your asset allocation. Control how closely your emotions are tied to an up-and-down market. Bigger picture, you can take better control of your entire financial experience. This article looks at foundational tenets of evidence-based investing to give you confidence when you think…

Invest Now or Temporarily Hold Your Cash?

At some point in their lives, investors may receive a large sum of cash, such as a pension payout or inheritance. Finance theory and historical evidence suggest that the best way to invest this sum is all at once according to an investor’s asset allocation. Many investors nevertheless choose to put the money to work over time, a systematic implementation plan that is commonly referred to as dollar-cost averaging. We explore the benefits of both strategies, quantify the costs, and reach three conclusions that can guide decision-making. History and theory support immediate investment. On average, an immediate lump-sum investment has…

When Emerging Markets Outperform

Earlier this week, we looked at emerging markets and why many investors stick to domestic stocks due to two biases: home country and recency, despite a compelling case for emerging market investing. To more fully understand the case for global diversification, I’ll resume the discussion with an exploration of two studies related to emerging markets. The Importance Of The Book-To-Market Ratio Michael Keppler and Peter Encinosa, authors of “How Attractive Are Emerging Markets Equities? The Importance of Price/Book-Value Ratios for Future Returns,” which appears in the Spring 2017 issue of the Journal of Investing, provide us with some further insights as to…

Fiduciary Now, Fiduciary Always

WE ARE ALWAYS COMMITTED TO DOING WHAT’S RIGHT FOR YOU You may have noticed the word fiduciary bouncing around the news lately. The Department of Labor announced last April that financial advisors who provide retirement investment advice would be held to a new fiduciary rule — that is, they would be required to put investors’ interests ahead of their own. What followed was applause in some corners, angst in others, and spirited dialogue and debate all around the room. Now, the fiduciary rule hangs in midair as the new administration has asked the DOL to review the wide-ranging implications if…