The Package

It’s springtime in St. Louis, and like so many of my neighbors, my sinuses are paying the price. And while we’re airing grievances, let me also say that I’m not looking forward to those 100-degree-plus days that await us this summer – any more than I enjoyed watching the thermometer plunge to zero just a few weeks ago.

But those things are part of the bargain we routinely accept for the privilege of living in this wonderful place the rest of the time. It’s the seasonal burden we gladly bear in exchange for getting to raise our families here. And I wouldn’t have it any other way. I understand the tradeoffs, and I am happy to accept the bargain.

In addition to my unabashed affection for the city in which I’ve spent nearly all of my adult life, I am also a diehard fan of owning stocks, which I have done without interruption over the last five decades. Both of these decisions have served me well: I have enjoyed almost to the point of taking for granted all the wonderful things St. Louis has to offer, and a lifetime of equity ownership virtually assures that I will be able to spend the rest of my days here with few financial worries.

It occurs to me that owning stocks is quite similar to living in a hometown that you love. In both cases, the long-term benefits become obvious when you bother to observe them. But the short-term risks – the price we pay for those benefits – are inescapable.

My friend and financial author Nick Murray calls this tradeoff The Package. In order to enjoy the superior historical returns that equities have offered, investors have had to pay some very substantial emotional costs along the way.

For example, in the half-century or so that I’ve owned stocks:

• The S&P 500 is roughly 65 times higher in price than it was in 1978.

• The cash dividend of the index has increased more than 15-fold.

• The Consumer Price Index was up about five-fold. That means retired investors needing income were able to stay well ahead of inflation over this period with their dividends alone.

And yet, over that same period of time:

• There have been 23 market pullbacks in excess of 10%, which we call corrections. That’s one every couple of years on average.

• Six of these declines went on to become full-fledged bear markets – painful selloffs in excess of 20%. That means I’ve seen a bear market every seven or eight years on average. (It’s also when I made some of my most profitable investment decisions.)

• The corrections on average lasted about three months apiece and knocked stock prices down about 14%. The six bear markets lasted nearly 14 months on average and wiped away more than a third (37%) of the market’s value to disappear each time, yet in each case, the market later went on to even greater highs.

In the interest of full disclosure, I have no idea how my personal investment results have compared with the S&P 500, for two reasons: 1) My portfolio has never looked much like the S&P 500; and 2) I’ve never seen a reason to keep score in the first place.

Let us also caution that past performance is not indicative of future results. But lacking data on the future, the past is all we have, and today’s investment decisions should reasonably begin with the assumption that the next 50 years might at least look somewhat like the last 50.

If you are comfortable with that, here then is The Package:

• We would love to earn returns comparable to what equity investors have enjoyed since 1978: +9.3% per year on average (+12.2% with dividends reinvested).

• As part of the bargain, we also accept the possibility – the historical likelihood – that every couple of years our portfolio will be down 14% or more. And we acknowledge that every seven or eight years on average, we could watch our stocks drop by more than a third in value. History also tells us that these declines – every one of them – have been temporary.

• And finally, because we can find no one who has been able to avoid market downturns accurately and consistently, we refuse to waste our time and money trying to time the market. Instead, we agree to stomach the short-term risks in exchange for the long-term returns, whatever history tells us they are likely to be.

Sounds like a reasonable bargain to me, because the odds remain stacked in favor of long-term equity investors.  I can’t wait to see how I do in the next 50 years.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mike Brown and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

S&P 500: This index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. It consists of 400 industrial, 40 utility, 20 transportation, and 40 financial companies listed on U.S. market exchanges. This is a capitalization-weighted calculated on a total return basis with dividends reinvested. The S&P represents about 75% of the NYSE market capitalization.