https://www.cwbwealth.com/en/news-and-stories/insights/youve-got-to-be-in-it-to-win-it
“The factory of the future will have only two employees, a man and a dog. The man will be there to feed the dog. The dog will be there to keep the man from touching the equipment.” – Warren Bennis1
Investing is a human endeavour and, therefore, involves emotions – notably fear and greed, with fear being the dominant one. When markets periodically sell off, fear can compel investors to exit. In doing this, they run the risk of missing out on sudden and powerful recoveries which make up a significant part of their lifetime returns. Like the old saying goes, “You’ve got to be in it to win it!”. Having a sound plan and a trusted advisor can keep you from touching the equipment when it matters most.
As we close out 2022, to say it’s been a challenging year for investors would be an understatement. The traditional U.S. ‘balanced’ portfolio (60% S&P 500 and 40% 10-yr treasury bonds) was down 17%, the worst performance in over 50 years (see figure 1).
Figure 1: The 60/40 Portfolio: 1967-2022
Source: BCα Research 2023
It’s very unusual to have both major asset classes so weak and below their long-term averages at the same time. In nearly 100 years’ time, there’s never been a year when both the U.S. stock and bond markets were down over 10% in the same year. This year, there was basically nowhere to hide.2
Episodes like these can rattle even the most experienced and sophisticated investors. By mid-September, we were having many difficult conversations with nervous clients. Some were tempted to get out of the market entirely and seek the relative ‘safety’ of cash and GICs, implicitly willing to accept a return below inflation to escape the market volatility. Others considered moving entirely out of one asset class to double down on another that might have a more favourable short-term outlook.
Successful investing relies on patience, discipline, and faith in the future. We may not know exactly when markets will recover, but we know they do recover at some point – as they always have.
Long-term returns on asset classes are fairly consistent3, but what surprises many investors is how much of the return is generated over short periods of time. This is why it’s important to stay committed to your investment plan when things get shaky in the markets. If you deviate from the plan and step out of certain asset classes, you could miss sudden bursts of strong performance. Without these strong periods, your long-term returns will be lower than they otherwise would have been.
We experienced this recently with our pooled funds. Figure 2 shows that after the first nine months of 2022, our equity-based pools were down between 6.75% to over 23% year to date, and our less volatile fixed income/balanced pools were down 8.6% to 13.2%. The main narrative in the markets was high inflation and a sharp tightening of monetary policy from the world’s central banks. Clients were uneasy to say the least.
Figure 2: Year-to-date Investment Strategy Results from Sept – Nov 2022
Source: CWB Wealth/CWB Wealth Partners
What happened next was interesting. In October, the mood turned positive on hope for a Fed pivot on monetary policy. Our global equity pool rallied by over 5%, led by a 7% surge in U.S. equities which were halfway back to even for the year at that time. Canadian equities were almost positive for 2022.
If October was interesting, November was stunning. North American equities rallied by another ~5%, but the beleaguered international equity sector shot up by almost 12% during the month, recovering over half the year’s decline. Most of this occurred during the first two weeks of November. Canadian equities were +3.7% for the year, and U.S. equities were basically flat (-0.74%).
Our clients with Balanced investment plans (~60% equity) had gone from being down over 13% at the end of September to down only 4.5% by November 30. Those on more aggressive Full Equity mandates went from -17% to -3.8%. Still negative for the year, but some strong momentum going into December.
Most investors would have gladly accepted mid-single digit losses for 2022 if you had asked them in June, while the headlines were focused on a looming recession, the war in Europe and a general doom and gloom narrative.
These numbers show that equity investors who stayed committed to their well-designed plans picked up over 13% in returns during October and November. That would be an above-average year in equities. Balanced investors got almost 9%.
The learning here is that anyone who lost faith and abandoned their plan would have had significantly lower future returns. It wouldn’t have been possible to see this coming and ‘get back in’ before the sharp upturn. That sort of timing strategy is almost impossible to pull off and never works consistently.
What’s most noteworthy is the massive rally (+11.67%) in international equities in November. They have significantly underperformed the U.S. for most of this decade, and many investors were starting to question the benefits of equity diversification. Then, something like this happens and we remember why we advise clients to remain diversified. Most people have already forgotten that for the decade 2000-2009, the total return on the S&P 500 was negative. They remember the last decade of mid-teens annualized returns (~13.6%) but forget what came before it.
Successful investing is not easy. It requires planning, discipline, and commitment. And enough confidence in your plan and advisor to stick with it when the going gets tough. You’ve got to be in it to win it.
Epilogue
At the time of writing (late December 2022), North American equities have pulled back by ~6-7% for the month. Interestingly, international equities have continued with their positive momentum, now -8.2% YTD. The net result is that they have almost caught up to U.S. equities (-7.5% YTD). Diversification works, often when you least expect it!
Sources:
1 Warren Bennis was a university professor and Distinguished Professor of Business Administration at the Marshall School and Founding Chairman of The Leadership Institute at the University of Southern California. (Source: Wikipedia)
2 Cash, Canadian energy stocks, and other select niche investments were rare exceptions. (Source: PC Quote, Bloomberg)
3 S&P 500 long run annualized nominal returns are consistently 10-11%. Over the last 100-200 years REAL (inflation-adjusted) returns on stocks have been 6.7-7.7%, bonds 2.7-3.1%, cash 0.8-1.7%. Commodities have negative real returns across all time horizons. (Source: Dimensional Fund Advisors, Long-Term Asset Return Study (Jim Reid/Deutsche Bank, GFD, ICE Indices))
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