Updated: Nov 28, 2022
SUMMARY:
We currently sit about 15% down for the year in the S&P 500 after being down by 25% a month ago (mid-October).
The S&P has climbed about 10% in the last month.
This bear market decline looks similar to the bear market of the 1970’s.
Technical analysts who rely on stock charts would say that we are still in a down trending pattern. But the technical analysts would become bullish if the S&P index continued to climb another 5% (breaking through the prior peak in mid-August) to over 4,300.
At eleven months into this bear market of 2022, it is a good time to step back and get some perspective. It has clearly been a tough year. As of the market close on Friday November 25th, the S&P 500 is down 15% from its previous peak at the start of the year. The Nasdaq and the Russell 2000 are down 29% and 23% respectively. The Vanguard Total Bond Index (BND) is also down 15% for the year. Bonds did not help your portfolio this year. The S&P hit its low of the year (drawdown) on October 12th - down 25%. Also in mid-October, the Nasdaq reached its low (drawdown) of -34.8%. Since mid-October the S&P and the Russell 2000 have made a nice climb while the Nasdaq has not increased at the same pace.
2022 Data through November 25th
Here is a comparison of the three indices in 2022. The patterns are very similar, but the S&P 500 has fared much better than the Nasdaq or the Russell 2000. In the graph, you can see how the Nasdaq has lagged the other indices in the last month. The market continues to punish technology stocks this year.
Throughout 2022, we have been comparing this bear market with the bear market of the 1970’s. The graphs line up well as you can see below, and the seventies were the last period where we experienced high rates of inflation. The 1970’s market was only halfway through its decline at this point and continued falling for another year. It bottomed out with a price drop of 44%. You can also see from the chart below that markets don't usually drop in a straight line. In both bear markets (1973 and 2022), the markets have what are termed "bear market bounces." There are short attempts at a rebound where prices increase by 10% or even 15% only to be followed by another move downward.
Let’s look at another view of the S&P this year to see what the technical analysts are looking at. Analysts see a succession of lower highs and lower lows throughout the year which is typically bearish. The top diagonal line in the graph below is called a resistance line and the bottom diagonal line is called the support line. As of 11/27 the S&P is approaching the resistance line. If the price breaks through that line it would be a bullish sign for the chartists. But they would be more optimistic if the S&P climbed back to and broke through the mid-August high of down 10% or roughly 4,300 for the S&P. If the index reverses and turns down from here, we would still be stuck in the downtrend.
We are now just about eleven months from the pre-crash peak for the S&P and about thirteen months from the peaks of the Nasdaq and the Russell 2000. The average length of a bear market decline is eleven months, so it is possible that we are in the late stages of this crash. But we just saw that the 1970’s bear market decline lasted two years.
The reality is that no one knows if the worst is over or not. The direction of inflation and the economy and corporate profits will likely dictate when we begin the inevitable rebound. Because of the uncertainty, it is important to follow a disciplined approach to stock market investing. Our BB&H system is down 5.3% for the year and is fully invested at present because of the recent rise in the markets. We are positioned to benefit if the market keeps moving higher and we have automated orders placed to limit losses if the market turns down from here. Stay disciplined, my friends.
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
Bonds lower your long term investment returns
SUMMARY:
Bonds are supposed to lower risk in your portfolio. Bonds are supposed to be a "safe" asset. Bonds are supposed to provide a cushion during bear markets like the one we are now experiencing in 2022. All of this sounds comforting. But, what does the data show? Do bonds really help our portfolios? How much cushion do they provide?
Bonds or fixed income assets are supposed to provide a predictable return and a measure of safety. The main reason to be in “safe” assets (cash, money market funds, bonds, etc.) is due to the risk of losing money in other asset classes like stocks and commodities.
Since the stock market always has a risk of losing value in the short term, you are advised to keep a portion of your long-term investments in bonds or fixed income products. One problem with that approach is that bonds can and do lose money. In 2022, bonds are down roughly 15% due to the increase in interest rates. When interest rates rise, the value of bonds go down.
There are various approaches to determine how much of your long-term investments should be in bonds or fixed income. The standard “rule of thumb” people like to use is 60/40 where 60% of your investments would be in the stock market and 40% of your money would be in bonds or fixed income securities. Financial advisors will also tell you that the percentage split should vary based on your age. For example, if you are 35 years old, they would advise you to allocate a higher percentage of your assets to stocks and a smaller percentage of money to bonds because you are 30 years away from retirement and, therefore, have more time to wait for a stock market recovery after a bear market crash. And, conversely, if you are older and would likely be spending some of your investments sooner, you would be advised to keep a smaller percentage of your assets in stocks. Rather than a percentage allocation to cash and fixed income assets, the best way to determine the split is the timeline of when you would need access to the money. That is a topic for another day. For today’s example, we will be using the standard 60/40 split between stocks and bonds.
Bond Returns vs. Stock Returns
Let’s compare the historical returns of the stock market with the returns of the bond market. For the stock market, we will be using the return data for the S&P 500, and we are including annual dividends. For the bond market, we will use 10-Year Treasury securities, and we are including price changes in addition to interest payments. Here is the data for the last 50 years – from 1972 through 2021.
So, over a 50-year timeframe, you would have earned 3.3% more each year (10.5 vs. 7.2) if you had all your money invested in the stock market vs. all of your money invested in the bond market. A 60/40 split between stocks and bonds would have lowered your returns by 1.3% per year (10.5 vs. 9.2). What seems like a small difference (1.3% per year) makes a huge difference in your investments over a 50-year period. An all-stock portfolio with a beginning value of $100,000 would grow to $14.7 million over a 50-year period with an annual return of 10.5%. This is a great example of the power of compounding. A 60/40 portfolio with the same starting value would grow to $8.2 million with a return of 9.2%. You would have 80% more dollars or $6.5 million. That is a lot of money.
When we look at current returns for stocks and bonds, the results are even more significant. Stock returns are now lower than the 50-year average because dividend payouts are much lower than they were 40 years ago. And current 10-year treasury notes pay about 4.3% in annual interest. The 50-year average for bond rates above were higher because they included the high inflation and high interest rate environments of the 1970’s and 1980’s where bond payouts often exceeded 10% per year. Using current rates of return, the 60/40 portfolio would cost you 1.9% per year compared to an all stock portfolio (9.1% vs. 7.2%).
If the 60/40 portfolio provides much more safety and security during market crashes, it might be worth the lower returns. But how much safety and security does a 60/40 portfolio provide?
Let’s look at the major bear markets of the last 50 years.
The 60/40 Portfolio in Bear Markets
The 60/40 portfolio does provide some cushion during bear markets, but just over 1% per year on average. We are looking at the complete bear market cycle here which represents the time from the prior price peak to the end of the bear market when price recovers to the prior peak. So, the only returns from stocks would be annual dividends. Bond yields are measured based on both annual interest plus any changes in price of the bonds. So bonds, do help a little bit in bear markets but only by about 1% per year. In the current bear market of 2022, bonds are not providing any benefit.
The 60/40 Portfolio in Bull Markets
Not surprisingly, the 60/40 portfolio weighs down investment returns during bull markets. Again, we are including price appreciation plus dividends in the stock market returns. Bond yields are measured based on both annual interest plus any changes in price of the bonds. A 60/40 portfolio costs you almost 4% per year in returns compared to a portfolio of 100% stocks. Notice how high stock returns are during these decade long bull markets – over 17% per year. And notice how high bond returns were in the 1980’s and 1990’s as yields were much higher and bond prices appreciated due to a steady decline in interest rates.
If you need access to your investments in the next few years, you should not be investing that money in the stock market. Those funds would not qualify as long-term investments. For money that you do not plan on accessing for 5 or 10 or 20 years or more, your investment returns will be higher in a 100% stock portfolio vs. a 60/40 stock and bond portfolio. But I am sure many of you are concerned about your peace of mind and the comfort of owning bonds. The problem is that bonds provide only an illusion of safety as the previous analysis shows. In 2022, long-term bonds have decreased about 20% in value or just about the same as the stock market. The point is that fixed income investments are not the best way to protect your portfolio from stock market collapses. The financial professionals will tell you so, but it just isn’t true. There is a small benefit (1% per year) to the 60/40 portfolio in bear markets but a bigger cost (4% per year) during bull markets. It is simply not a good solution to the problem of bear markets. Our Beyond Buy & Hold system is a direct and better solution to the problem. You can participate fully and aggressively in bull markets and sidestep bear market collapses without the cost and the illusion of safety of bonds.
Be well,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
Updated: Oct 29, 2024
No one beats the S&P 500 Index funds in the long term
SUMMARY:
We are all suckers for stock tips. People are always trying to tell you about the next Amazon or the next Apple. You must get in early on the next “hot” industries or companies, right?
We are all led to believe that the experts are so good that they can pick the winners of the future. Well, what does the data say? How many of the so-called experts outperform in the long run? Would you invest differently if the statistics said that the answer is none of them?
Stock Picking Gurus
Most investors are familiar with the famous investing legends like Warren Buffett and Peter Lynch. There are many more that appear on CNBC or the best seller lists. In the online world, we all hear about the incredible returns that some investing superstars posted last year or last month or last week. Some of these people achieve rock-star status. They fit perfectly into our celebrity culture. The media loves to promote these investing geniuses. Millions of people follow their trades to duplicate their results. They must have incredible gifts, or they must just work harder than the millions of other investors out there. But when we look at investing results over a long period of time, what does the data say?
How Should We Evaluate Investing Performance
What data should we look at when we want to look at investing performance? What timeline should we use? Should we focus on the last 12 months? Should we focus on the last 5 years, the last 10 years, the last 20 years? Unfortunately, the media focuses too much attention on short-term investing results and that leads to investing mistakes for many people. The isolated examples of 500% returns for some stock for the last six months gets a lot of attention because it generates a lot of views. The options traders promote their extraordinary winning trades for the last week. But investing in the stock market is and should be a long-term thing.
If you are in your early working years (your 20’s or 30’s), you won’t be accessing your 401K investments for another 40 years or more. Even if you are 65 and have recently retired, you still have an investing timeline of 25 years or so. Any money you will need to access in the short-term (then next five years) should not be invested in the stock market. So, the shortest timeline we should be looking at for investing performance is five years, but the most important timeline for investing performance is 20 years or more. Monthly or quarterly or annual investment returns can be interesting, but they should not be what we focus on when evaluating investment performance.
What Does the Data Say?
There have been many published studies that look at the performance of stock pickers over a five-year timeframe. The results have consistently shown that only 8% of stock pickers (mutual funds) outperform the S&P 500 index funds over a five-year time horizon. So, in other words, 92% of these highly paid investment gurus do worse than simply investing in a passive index fund. But, as I mentioned previously, five years is not significant for investing performance. Earlier this year, I ran a report of the top performing mutual funds over the last ten years. Out of the 9,000 mutual funds in the marketplace, I only found ten that performed better than the S&P 500 and they only beat the S&P 500 by about 2 percentage points. So, only 0.1% of mutual funds (the stock pickers) beat the passive index funds over a ten-year period. This happened to also be one of the best ten-year time periods for investing results in stock market history. I then looked at the returns of these same ten high performing mutual funds in the crash of 2008. These top performing funds lost an average of 40% in 2008. So, they performed very well in a long bull market, but they lost a lot of money in the previous bear market. I mentioned Peter Lynch of the Fidelity Magellan fund earlier. The Magellan fund was the top performing mutual fund in the 1980’s when Peter Lynch ran the fund. But after he retired, the performance of the Magellan fund has been below average. The data is very clear. NO stock pickers outperform the market as defined by the S&P 500 over the long term; periods of 10, or 15 or 20 years or more.
Individual stock pickers and day traders and options traders don’t compare their results to the S&P 500 over long time periods. Just like gamblers, you always hear about their winners, and you don’t often hear about their losses. They think that the big winner must more than offset the losers. If you are a stock picker or a day trader, make sure you evaluate your results against the main benchmark (the S&P 500) in all time periods, not just the times you got lucky.
Chasing Investment Returns
A focus on short-term investing results leads to one of the biggest investment mistakes that many people make, chasing investment returns. Chasing investment returns happens when an investor sees a report of the highest performing stocks or mutual funds of the past six months or past year, and they then shift their money from their current stock investment into that high performing fund. They are then disappointed in the performance of that new fund in the following six months or year. This happens because the short-term results that the fund achieved are not sustainable in the long run. Investors who make big bets on individual stocks or stock sectors can get lucky and win big in the short-term, but those results don’t last. No one is clever enough to pick the hottest stocks or hottest sectors for every market cycle over long periods of time.
Picking Stocks is Gambling
It is impossible to predict the direction of the entire stock market in the short-term. In the long-term, the stock market will go up, but there is no way to know how the market might move this week, this month or even this year. There are just too many variables and factors to predict. Everyone has a prediction, but nobody is right all the time. The variables and factors involved with individual stocks is even greater. You could pick a great company in a great industry, but when the market drops it typically takes every stock with it. And even if the market goes up, the stock could get hurt by industry issues, regulatory issues, company performance issues, competition, etc., etc., etc. The stock market in total has never gone to zero, but individual stocks can and do go to zero. Companies go out of business all the time.
But, just like the stock pickers mentioned above, you could get lucky. You could pick the right industry and the right company at the right time, and you could win, and you could win big. This can be very exciting. This can be fun, and it is okay to experiment with money that you can afford to lose. But don’t invest more than 5% of your portfolio in individual stocks at any time. Just be aware that the individual stock segment of your portfolio will underperform your investments in market index funds over the long-term.
Picking Stocks is Hard Work
In addition to being an unsuccessful strategy, it is hard work. Picking stocks involves a lot of research and a lot of monitoring, weekly at a minimum and often daily. If you want to day trade or trade in options, you need to be glued to your computer screen all day. If all this work resulted in superior results and you enjoy this work, then I would say go for it. But it is a lot of work for lower returns compared to buying an index fund. Buying an S&P index fund or a Nasdaq index fund on the other hand is easy. There is very little research involved and much less news to stay up on. And for very little effort, you get better results. The S&P 500 produced annual returns of 15.1% before dividends for the ten years between 2015 and 2024. If you reinvested the dividends, your returns would have been closer to 17% per year. If you invested $100,000 in an S&P index fund at the beginning of 2012 and simply held it for ten years, your money would have grown to over $400,000 at the end of the ten years.
But What About Bear Market Crashes?
Bear market crashes affect individual stocks, but they also impact index funds. Bear market crashes happen about once every seven years on average. And the S&P 500 drops by an average of 37% in these crashes. Until now, you had no choice but to “Buy & Hold” or to simply wait it out. We created the Beyond Buy & Hold system to deal with these bear market crashes. We have created a powerful way to “trade” these inevitable bear markets so that you don’t see your investments drop by 40% or more and, in fact, you can now make trading profits during the bear market cycles. We are so excited to share this investing breakthrough with individual investors. You can now get the best of all worlds. You can avoid the difficulty and the hard work of picking individual stocks or even mutual funds by simply investing in stock market index funds like the S&P 500 or the Nasdaq. And you can use our system to “trade” those same index funds during bear markets (see 2022) to avoid most of the losses and to profit when the bear market rebounds. And because you “own the market” with an index fund, you will get big annual returns in bull markets (roughly 15% per year before dividends). Follow along with our newsletters and we will show you how it’s done. We will walk you through it step by step and you can trade right along with us.
Be well,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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