Beware the ‘Ides of March’

On this fateful month (March 44BC), Julius Caesar was assassinated. A soothsayer had correctly predicted this occurrence and hence the historical importance of: a) people attempting to predict – especially in the money markets and b) March 2015 being the sixth anniversary of when the Global Financial crisis ended its downward trend. On the 9^th of March 2009, the S&P 500 closed at 676. A 57% peak to trough decline from October 2007, and the largest decline since the 1929-32 Great depression. There since followed one of the greatest rallies of all time and it has not ended. For the last 6 years the great Bull market has regained its losses and is now posting record returns. The S&P 500 having reached 2,100.

In last weeks article I highlighted the principles of investment. Faith, patience and discipline because maintaining rationality to ones investment goals through times of cyclicality are nigh impossible as the world and its catastrophists pronounce the next Armageddon. It’s in understanding the inevitability of bear markets (declines of 20% or more) however that allows us to ‘patiently’ sit through them – and sit through them we must because they occur roughly every 5 years. Which means you will experience 6 of them between age 30 and age 60, and another 6 between age 60 and age 90. I was born in 1949 – 14 bear markets later, however the S&P 500 (without dividends) has grown from 100 to 2,100.

Today we focus to the three practices important in creating and maintaining wealth. We need to know what assets will best grow our wealth and how to reduce volatility and risk. The practices: asset allocation, diversification, and rebalancing. Since 1926, small company stocks (equities/shares) in US have grown at 12%. Large company stocks 10%. Corporate bonds 6%. Inflation 3%. Which means that real returns of equities (that is gross return less inflation) has been two to three times that of fixed income investments. As an accumulator in Superannuation (KiwiSaver) what else do you need to know. Empirical evidence does not mean certainty; however, rationality under uncertainty would seem to place a high expectation to capitalisms continued focus on business as being the most rewarding aspect of investors’ choice i.e. profitable companies around the world. Buy shares in these great companies and sit on them.

As an aside I use the S&P 500 as a proxy for equity performance:

1. The US comprises 47% of the world’s capital markets – the closest in size are UK and Japan with 7% each
2. The US has statistics which are validated from a lot earlier that NZ stats
3. NZ comprises less than 1% of world capital markets and Aust/NZ combined, around 3%)

Knowing what assets to accumulate is therefore critical (in fact 94% of your ultimate return). Having the patience to sit through six market declines and the discipline to continue investing (putting money in through stressful times) is almost impossible in the face of journalisms end of the world assertions.  But that’s what’s needed – to be counter cyclical.

People mistake cyclical declines in stock prices for the risk of permanent loss. Where is the long term risk in an asset class (S&P 500 – large company stocks) which is trending four times where it was 20 years ago and paying a dividend three times what it was then. Or a level ten times higher than it was 30 years ago and paying a dividend at four times.

Next week: How does diversification and rebalancing reduce volatility and risk and what time frame does it take (on average) for markets to recover – from peak to trough to new record highs.

Meanwhile beware the person bearing gifts, promising returns and predicting the future – investing in knowledge pays the greatest return.