Q: from my week end "musings"The Reality of Long Periods of Underperformance
The following is from Meb Faber. I felt it worth sharing with you. Please feel free to share it with your clients.
One of the biggest challenges of investing is long periods of underperformance, or outright negative performance and losses. Cliff Asness has a fun piece out on his blog where he talks about 5 year periods in stocks, bonds, and commodities and basically how anything can happen.
Unfortunately for investors there are only two states – all-time highs in your portfolio and drawdowns. Drawdowns for those unfamiliar are simply the peak to trough loss you are experiencing in an investment. So if you bought a stock at 100, and it declines to 75 you are in a 25% drawdown. If it then rises to 110 your drawdown is then 0 (all time high).
One challenge for investors is how much time they spend in drawdowns. It is emotionally challenging largely since they anchor to the high value in their portfolio. If your account hit $100,000 last month up from $20k ten years ago, likely you think of your wealth in terms of the recent value and not the original $20k. If it then declines to $80k, many think in terms of losing $20k rather than the long term gain.
I thought it would be interesting to look at a few asset classes and ask how long they spend in each outcome – either all-time highs or in a drawdown. Below is a chart of a basic 60/40 portfolio’s drawdown since 1972, REAL RETURNS. Notice how brutal the high inflation 1970s were to the portfolio:he investor only spends about 22% of the time at new highs, and the other 78% in some form of drawdown. A few values for common asset classes below….
• US Stocks 17% new highs, 73% in some form of drawdown
• Foreign Stocks 12% new highs, 88% in some form of drawdown
• Bonds 16% new highs, 84% in some form of drawdown
• REITs 16% new highs, 84% in some form of drawdown
• Commodities 9% new highs, 91% in some form of drawdown
• Gold 4% new highs, 91% in some form of drawdown
• 60/40 22% new highs, 91% in some form of drawdown
Meb concludes, “So if you’re going to be an investor, get used to being a loser!”
print ONY if you think worthwhile info for members
CDJ
The following is from Meb Faber. I felt it worth sharing with you. Please feel free to share it with your clients.
One of the biggest challenges of investing is long periods of underperformance, or outright negative performance and losses. Cliff Asness has a fun piece out on his blog where he talks about 5 year periods in stocks, bonds, and commodities and basically how anything can happen.
Unfortunately for investors there are only two states – all-time highs in your portfolio and drawdowns. Drawdowns for those unfamiliar are simply the peak to trough loss you are experiencing in an investment. So if you bought a stock at 100, and it declines to 75 you are in a 25% drawdown. If it then rises to 110 your drawdown is then 0 (all time high).
One challenge for investors is how much time they spend in drawdowns. It is emotionally challenging largely since they anchor to the high value in their portfolio. If your account hit $100,000 last month up from $20k ten years ago, likely you think of your wealth in terms of the recent value and not the original $20k. If it then declines to $80k, many think in terms of losing $20k rather than the long term gain.
I thought it would be interesting to look at a few asset classes and ask how long they spend in each outcome – either all-time highs or in a drawdown. Below is a chart of a basic 60/40 portfolio’s drawdown since 1972, REAL RETURNS. Notice how brutal the high inflation 1970s were to the portfolio:he investor only spends about 22% of the time at new highs, and the other 78% in some form of drawdown. A few values for common asset classes below….
• US Stocks 17% new highs, 73% in some form of drawdown
• Foreign Stocks 12% new highs, 88% in some form of drawdown
• Bonds 16% new highs, 84% in some form of drawdown
• REITs 16% new highs, 84% in some form of drawdown
• Commodities 9% new highs, 91% in some form of drawdown
• Gold 4% new highs, 91% in some form of drawdown
• 60/40 22% new highs, 91% in some form of drawdown
Meb concludes, “So if you’re going to be an investor, get used to being a loser!”
print ONY if you think worthwhile info for members
CDJ
