Stocks in the long-run, plus average returns, time horizons, and risk tolerance
The Sandbox Daily (12.18.2023)
Welcome, Sandbox friends.
Today’s Daily discusses:
in the long run, stock prices go up
no such thing as average returns
time horizons matter
risk tolerance is foundational
Let’s dig in.
Markets in review
EQUITIES: Nasdaq 100 +0.64% | S&P 500 +0.45% | Dow +0.00% | Russell 2000 -0.14%
FIXED INCOME: Barclays Agg Bond -0.20% | High Yield +0.06% | 2yr UST 4.459% | 10yr UST 3.945%
COMMODITIES: Brent Crude +2.08% to $78.14/barrel. Gold +0.25% to $2,040.7/oz.
BITCOIN: +0.87% to $42,453
US DOLLAR INDEX: 0.00% to 102.551
CBOE EQUITY PUT/CALL RATIO: 0.53
VIX: +2.28% to 12.56
Quote of the day
“Never underrate either the majesty of simplicity or its proven effectiveness as a long-term strategy for productive investing. Simplicity, indeed, is the master key to financial success. I look at indexing as being simple and, sad to say, boring. Be bored by the process but elated by the outcome. In Vegas, it’s the opposite. You’re elated by the process, by the moment, but you’re bored by the outcome because you know exactly what it will be. The more you bet, the more you lose. Investing shouldn’t give you a rush.”
- Jack Bogle, Founder of Vanguard
In the long run, stock prices go up
This is my basic investment philosophy distilled into one simple chart.
This is a bet on technology and innovation, a bet on the C-suite to protect margins and moat, a bet on management to lower costs in every quarterly reporting period, a bet on the consumer, and a bet on the judicial system to enforce fair and necessary guardrails around the ecosystem.
As Nick Maggiulli once wrote, JUST KEEP BUYING !
Why? Because the stock market generally goes up over time.
Source: Sam Ro
No such thing as average returns
The S&P 500 has a produced a long-term average return of roughly 8%.
Yet, as Ryan Detrick astutely notes, “going all the way back to 1950, we found there were only 4 years that stocks gained between 8% and 10% on the year.”
What’s the lesson? The historical data shows us an average year in the stock market rarely produces the “average” return.
Source: Ryan Detrick, CMT
Time horizons matter
In the stock market, time pays. The longer your investing time period, the more likely you will experience gains in your portfolio.
As they often say, it’s about “time in the market, not timing the market.”
Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all 5-year periods. Those are really good odds, if you buy and hold.
What’s more, there’s never been a period where the S&P 500 didn’t generate a positive return for all 16+ year time frames.
It’s only when you review time periods fewer than 2-3 years do the odds of the S&P 500 index being positive go down by a measurable amount.
Source: Bespoke Investment Group
Risk tolerance is foundational to your portfolio
In his book The Four Pillars of Investing, William Bernstein writes: “If your portfolio risk exceeds your tolerance for loss, there is a high likelihood that you will abandon your plan when the going gets rough.”
For most people, there is a range of asset allocations – the asset mix of stocks, bonds, alternatives, crypto, art, cash, and everything in between – that will meet their needs from a strictly mathematical point of view.
There are no shortage of metrics for investors to mull over: rolling returns, standard deviation (i.e. dispersion of returns), magnitude and length of drawdowns, percentage of monthly returns positive to negative, portfolio yield, and on and on and on. This is “investing in a vacuum.”
But to find the most viable option for you, you need to set aside the calculator and consult your tolerance for risk and volatility IRL, or as the kids these days: “in real life.” Some of these exercises can include looking at past performance and trade activity to understand how you reacted to difficult markets; others include questionnaires, surveys, and personality tests. Sometimes it may involve evaluating other activities or interests in your life to assess your responses to risk-taking endeavors.
Ultimately, you must be honest with yourself to understand how you emotionally respond when the going gets tough.
You must strike the right balance between life-in-a-vacuum and in-real-life to ensure with the highest degree of probability that you can stick with your portfolio through the market's regular ups AND downs.
Source: Napkin Finance
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.