I give these brilliant investment strategies a failing grade.
Q2 2020 hedge fund letters, conferences and more
As advisors and investors, we have evolved over the past several decades from foolish tactics such as picking hot stocks and market timing to more sophisticated strategies. Those sophisticated strategies are supported by peer-reviewed academic rigor. Yet they have failed almost as badly. Here is a look at several failed strategies along with some take-away lessons for the future.
Stocks for the long run - Jeremy Seigel
In 1994, Wharton professor Jeremy Seigel first published his ground-breaking book, Stocks for the Long-Run – The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies. It was based on almost 200 years of market history.
The data indicated that the worst 20-year inflation-adjusted return for bonds was an annualized loss of 3.1 percentage points while stocks bested inflation by one percentage point, annually. Thus, stocks were actually less risky than bonds as long as one stayed the course. And the worst we could expect is that stocks would only best bonds by 4.1 percentage points. Who could refute 195 years of history?
But the markets didn’t read the book.
In the 20.5 years since the beginning of this century (12/31/99 ), a portfolio of half U.S. and half international stocks, rebalanced annually, returned 4.58% annually, while a Bloomberg Barclays bond fund returned 5.00% annually, according to Portfolio Visualizer. I’m using international stocks since we live in a global economy.
This isn’t a new phenomenon. A 2009 Ibbotson paper demonstrated that long-term government bonds slightly bested the total return of the S&P 500 for the 40-year period ending March 2009.
So what went wrong? History doesn’t always repeat itself. But just as important, we don’t know how accurate the data is. Wall Street Journal columnist, Jason Zweig, questioned whether Siegel’s data went back 200 years. How accurate was it? Other data showed that between 1803 and 1871, bonds did best stocks.
It turns out that a balanced portfolio of 30% U.S. stocks, 30% international stocks, and 40% bonds (rebalanced annually) did better than stocks or bonds alone, returning 5.29% annually.
Lessons learned: Holding stocks for the long-run may be longer than you can wait. It’s not a choice of stocks or bonds but rather holding both and rebalancing to control risk.
Read the full article here by Allan Roth, Advisor Perspectives
