Returns and Corrections, the two are quite related. Though we have talked of the subjects and they are also present in our agreement and terms and conditions in various ways, we feel we should further clarify the salient features.
Long term returns, the drama, pain, and joy: Over long periods of time, the Stock market with a return of about 11% has been the best performing asset classes. I refer you also to our web site where we present its history and how it has outclassed other asset classes. However, it is packed with drama, theatrics, pain and joy.
The pain and Joy. First, the pain.
Level 1 Corrections.: 7 to 10% declines happen just about once a year. It is almost a routine. Please expect them.
Market returns are lumpy. This means that in many cases returns occur in a relatively short period while the market then goes sideways or even down creating zero returns over months and quarters. You may consider this as sort of Level 1 Corrections as well.
Level 2 Corrections: Even 10-20% declines happen just about every 18 months and may happen swiftly within months. Every time something like this happens, it may wipe out months of gains and even years.
The math is simple. Imagine the market over a two year period has risen 20% and then in months it declines 20%. Net result is that two years gains are gone. Please do not be astonished when such a thing happens and in fact expect them every now and then. Similar math and sequence of events will then even result in one year gains to dissipate. Again, please do not expect yearly gains or gains every twelve months either.
Level 3 Corrections: Declines greater than 20% take place on average every four to five years as well. They wipe out years of gains sometimes even making four and five year returns as zero. We guarantee, something like this will happen again as well. Please expect such declines and do not expect gains even every four years either.
Level 4 Corrections: Even 50% declines from top to bottom take place every ten to 15 years leaving even a decade long return to zero. Please bear even this aspect in mind.
The Joy: The purpose of the above is not to discourage you or to frighten you but to explain the nature of the stock market and to add to your knowledge. You must then also realize that 7-10% up movements are also routine; stocks climb 20, 50 and even 100% in short periods and the up movements far exceed the down to then produce the 11 % returns over long periods of time – Returns so stellar that they handily beat other asset classes and inflation.
Earlier we noted that every now and then even four year returns may be zero or non-existent. However, note that four year returns that handily beat anything else are routine – one only has to think long enough.
Every now and then even ten year returns may be zero but the good news is that it is not that frequent that ten year returns did not beat other asset classes hands down.
Even more interesting is that such gains have come about thru wars, recessions and depressions, political upheavals etc., etc. Obviously, declines were an opportunity to add to holdings and to be patient.
We repeat one of our most favorite pictures —long term returns from Large Cap US stocks. One glance at the picture and you will also conclude that the above observations are quite correct. Most one year and four and ten year returns are positive and something to celebrate…One only needs to think long term and be patient.
Evaluating results: It is for this reason that we have it in our agreement that we should not be evaluating returns for periods less than five years (or as long as possible). We are not being evasive – it is the nature of the beast. In this very instance, looking at returns for just the period since march but not examining the period prior to that is not fair, I am sure you would agree.
Your specific situation: Though you have been investing with us only two and a half year and a short period, your account is a good illustration of what we have written above. The account cumulative performance went from 1 to 1.57 by March 20, 2015 meaning it appreciated 57% proving that markets can rise dramatically in short order and they just don’t decline only.
Then your account went from 1.57 to 1.5 over the next nine months again showing that it is quite normal for accounts to behave like so. It is to be expected and accepted. When you get your January statement, it is going to be lower by 7.88% from December and your cumulative index would have declined to 1.445 for a decline of some 8% from its high of March 20, 2015 but a decline of this magnitude has to be expected and accepted.
We don’t mean to frighten you but a decline of 8% is routine. You even need to expect declines of 20% and more. And as we pointed out earlier you will still make a lot of money in the long run if you can think like that.
Recent Energy crisis pales in comparison to many other events that have gone on. Ironically, the energy situation may actually be a silver lining for the world. We wrote about that and even sent you an email. We request you to read it.
The nature of corrections is such that it is just about impossible to tell when they will be over or have sufficiently stabilized. Numerous opportunities by investors have been missed when they waited for the market to stabilize. The art of successful investing and a best practice is to buy when things are down and at least be patient. So, we can not agree that we should be putting things in ‘safe’ places. Instead, we should look for good quality companies that have sold off excessively. And you in particular should be increasing your commitment to the equity markets.
As to future corrections: They are guaranteed to happen – just the way they happened over the past decades. We are very sure of that but feel like saying ‘ what else is new’. We are confident the declines will be followed by greater gains and the stock market will again be the best performing asset class over decades to come.
We have no intentions of making any changes at all for we feel most of what is happening is routine.
Please do not be offended here. We would urge you to also go thru our primer on our web site and think of all the crisis that have gone on while the stellar returns were produced – it may help. It is amazing how easy investing is only if one looks to long periods and long horizons.
Please consider all the above that we have written here. A lot of it we have talked about on occasions and much of it is in our Agreement and our Terms and Conditions. We note your emphasis on expectations of future corrections. We also must note that you have on a few occasions pointed out your concern about volatility and future returns. And we have pointed out that volatility is routine and there is the need to look into very long periods. This time we are putting it in writing as well for you to study our notes more formally.
Our advice to you: Thru your basic information that you have provided to us we think you need to be adding to your equity holdings on a regular basis and that this correction is indeed a good opportunity to do so.
At Tralucent, we are investors too: We want to remind you that at Tralucent, we eat our own cooking and your portfolios are similar to ours. When you are down, we are down too.
Conclusion: It is very possible that you do not accept our approach to investing or our explanation of the pattern of corrections and returns or are not able to live thru corrections or are unwilling to do so. In any of these situations, we would urge you to consider options other than the stock market or even another manager. This is NOT to push you away. On the contrary we love to have you as a money buddy and look forward to a very long relationship.
We will be happy to explain and discuss this note over the phone as well. Please let us know.