As we write on this day where the market charges up another 100 points, we are only reminded of this reality; No one really knows where the market will head on any particular day. More importantly, no one knows where the market will head on any particular year. Professionals in the industry state they know all the time, some because they believe they know and others because they want to reflect this prescience to clients as part of their value proposition.
Any such claim is bunk. When someone claims this expertise, ask them; “When might I be able to board your yacht?” If they had that knowledge they wouldn’t be battling it out in the trenches with mere mortals, but instead would be riding the high seas in a carefree and luxurious lifestyle.
The chart we have always found to be one of the most insightful and humbling graphs that exist. It is produced annually by Callan Associates, an US based institutional money management firm. I’m going to invite you to open it in a minute, but first some explanation so you know what you are looking at;
- The chart is arranged in columnar years, with each column representing the market returns (in percent increase (-decrease) for that year. The highest returns for any one year are shown on the top of that column.
- Each block in a column represents an asset class, such as Small Cap Stocks (Russell 2000 index), or Developing Countries (MSCI Emerging Markets). The color assigned to each asset class remains consistent over the span of years to make it easy to see and find.
- There are 20 years of data presented.
Okay? Now go look. The test, Mr. Phelps, is to try to find a pattern in the returns.
If you should find a reliable pattern, then I say one of two things;
- You are on better drugs than any of your peers.
- A lucrative opportunity awaits you in the investment field.
Our guess is that you will find no such pattern. Why? Because no such pattern exists. Consider this statistic; Every single day over 39 MILLION separate trades occur around the world, and these trades exceed $194 BILLION[i] in value. Why then, would any reasonable person presume that they will know more (or have more unique market data on) the other 38,999,999 people they compete against. Even more so, it is guesstimated that roughly 90% of all trades are generated by professionals, not exactly the easy pickings of the Beardstown Ladies investment club of repute in the late 1990’s (though they also were found to have ‘calculated returns wrong’).
Therefore, now you know why every fund prospectus must be accompanied by the warning words of; “Past performance is not indicative of future results.” They know the truth, and I think it is time for investors to know it as well. Well, at least you as our client.
Alternatively, what is known is that markets are volatile, but since the days of Marco Polo risk equals return. Secondly, on average, stocks will provide greater returns than bonds / fixed income. Notwithstanding markets can have extended periods of down or suppressed results (which is why your central portfolio contains no more risk than we’d consider wise for you and your plan), the equity market in this country will be up about 3 years out of every 4[ii].
Like the world of physics / chemistry, we are learning new things all the time. In the meantime, let’s try to be good students of history and take advantage of the lessons it provides. That formula is one where wisdom brings wealth.
[i] Global Electronic Order Book (largest 50 exchanges): Source; World Federation of Exchanges (2012)
[ii] Center for Research in Security Prices (CRSP 1-10 Index Returns, 1026-2013, 66 years out of 88)
