Long-Term Investing
In a Short-Term World
Scott MacKillop
February 20, 2014
To His Coy Mistress
Had we but world enough, and time,
This coyness, lady, were no crime.
--Andrew Marvell
(1621-1678)
Carpe Diem Doesn’t Work in Investing
Had we but world enough, and time,
Using three to five year evaluation
Periods would still be a crime.
--Clifford Asness
(1966--?)
You Can See the Problem
5-year return of S&P 500 ending 2012:
1.7%
5-year return of S&P 500 ending 2013:
17.9%
What is Long-Term?
Zephyr StyleADVISOR
Informa StyleADVISOR: Frontier Asset Management
Manager Performance
January 1950 - January 2014 (Single Computation)
$100000
S&P 500
$10000
$1000
$100
Dec 1949
Dec 1959
Dec 1969
Dec 1979
Dec 1989
Dec 1999
Jan 2014
A Similar Picture for International Markets
Zephyr StyleADVISOR
Informa StyleADVISOR: Frontier Asset Management
Manager Performance
January 1970 - January 2014 (Single Computation)
$10000
MSCI EAFE
$1000
$100
$10
Dec 1969
Dec 1974
Dec 1979
Dec 1984
Dec 1989
Dec 1994
Dec 1999
Dec 2004
Dec 2009 Jan 2014
A Similar Picture for Emerging Markets
Zephyr StyleADVISOR
Informa StyleADVISOR: Frontier Asset Management
Manager Performance
January 1990 - January 2014 (Single Computation)
$1000
MSCI EM
$100
$10
Dec 1989
Dec 1994
Dec 1999
Dec 2004
Dec 2009
Jan 2014
The World Favors the Long-Term Investor
Zephyr StyleADVISOR
Informa StyleADVISOR: Frontier Asset Management
Manager Performance
January 1990 - January 2014 (Single Computation)
$1000
$100
S&P 500
MSCI EAFE
MSCI EM
BarCap US Agg Bond
CPI Unadjusted
$10
Dec 1989
Dec 1994
Dec 1999
Dec 2004
Dec 2009
Jan 2014
Let’s Look at Smaller Chunks of Time
Since 1970: S&P 500 returned 10.4 % (7,683% cumulative)
• 9 down years (20%)
• 35 up years (80%)
• Highest return: 37.58% (1995)
• Lowest return: -37.00% (2008)
• 2 down years in a row 1973-1974
• 3 down years in a row 2002-2004
Now Let’s Look at 5-Year Periods
Since 1970 there have been 40, 5-year periods
• 7 down periods (18%)
• 33 up periods (82%)
• Highest return: 28.56% (1999)
• Lowest return: -2.35% (1974)
• Median return: 13.96%
• 3 down periods in a row 2002-2004
Now Let’s Look at 10-Year Periods
Since 1970 there have been 35, 10-year periods
• 2 down periods (6%)
• 33 up periods (94%)
• Highest return: 19.21% (1998)
• Lowest return: -1.38% (2008)
• Median return: 13.83%
• 2 down periods in a row (2008-2009)
Now Let’s Look at 15-Year Periods
Since 1970 there have been 30, 15-year periods
• 0 down periods (0%)
• 30 up periods (100%)
• Highest return: 18.93% (1999)
• Lowest return: 4.47% (2012)
• Median return: 12.22%
• Lowest return for 20-year periods: 7.81% (2011)
• Lowest return for 25-year periods: 9.28% (2011)
Back to Mr. Marvell
But at my back I always hear
Time’s winged chariot hurrying near.
Why is it so Hard to Take a Long-Term View?
• Uncertainty about the future
• Lack of education
• Outside influences
• Internal wiring
What Can We Do?
Reduce the short-term stress of long-term investing
How?
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Manage portfolios with a variety of objectives
Set downside risk limits for each portfolio
Build diversified portfolios
Use a future looking asset allocation approach
Pay attention to risk and correlations
Pick the best managers we can find
Combine managers to minimize downside risk
Watch our portfolios every day
What Can You Do?
• Change their frame of reference
• Give them faith in the future
How?
• Educate your clients about the markets
• Teach them what is actually important
• Educate your clients about behavioral tendencies
• Help clients identify the hucksters and the entertainers
• Don’t try to predict the future—be prepared for it
The World is Chaotic, but it is Not Random
The stock market will go up if people have:
• the desire
• the freedom
• the incentive
to improve their lives.
The stock market is a reflection of individual effort.
Don’t Be Fooled
Questions?
(Meet us in Atlanta!)
[email protected]