Turn Off the News: You Have an All-Weather Portfolio

Quick! What do the following numbers represent?  +9.35%   +4.46%   +7.00%

They are the 10-year, five-year, and three-year historical total returns ending 12/31/18 for the MSCI ACWI ETF. Remember that ACWI is the “All Country World Index” for stocks: U.S. and international stocks, large, mid and small, developed and emerging markets.

So, the fact that the one-year return was -9.12% should be easier to stomach.

According to Morningstar, the S&P 500 has had a monthly loss of more than 8% only 18 times in the last 50 years (or 18 of 600 months!). Eleven times (65% of the time), it recovered within two months; and three times, within eight months (82% total). Three recovery periods were 10, 12, and 19 months. The pendulum can swing quickly.

Five years is the optimum minimum period for measuring stock returns, in our opinion. One noted investment professional recently wrote that investors should look at 20-, 30-, and 40-year time periods, but that is challenging in a world where free overnight shipping is becoming not fast enough.

By the way, the five-year return of 4.46% is muted by the fact that the time period dropped off 2013, which had a strong return of +22.35%, and replaced it with 2018’s return of -9.12%. Even five-year periods have “end date sensitivity.” Conversely, the 10-year return jumped because it dropped 2008.

Behavioral finance research indicates that losses are twice as painful as gains are rewarding. That’s simple human psychology. The good news is that losses happen much less frequently than gains, but we tend to forget that for the same reason that we remember storms more easily than sunny days.

Our motto for 2019: “You have an all-weather portfolio.” Your portfolio is broadly diversified to weather any storm. Tune out the negative media hype—you are fine.

Our goal is to help you sleep well at night knowing that a strategic asset allocation in a broadly diversified, multi-asset portfolio emphasizing passively managed funds is a sound investment strategy. We look forward to serving you in 2019 and thank you for your continuing confidence and trust.

As always, please contact us with any questions, news, or comments.