Investing for the Long-Term
At Concentus Wealth Advisors, we firmly believe that nobody can predict the future. The world is way too complex for any one individual to accurately grasp the future, especially when dealing with the movements of the stock market. The ‘market’ is made up of countless participants: large institutions, companies, investment firms, day traders, teachers, laborers, college savers, retirees, pre-retirees, young and old, etc. The prices of stocks, and ultimately the ‘market’, are driven by supply and demand for stock ownership based on all available information, combined with the psychology and behavior of all ‘market’ participants. Anyone foolish enough to believe they can predict the impulses and vagaries of the markets over short periods of time should be disregarded. No one can predict where stock prices will be tomorrow.
While we believe that you cannot predict the future, we also see evidence of the progress made in the human condition through history. Less people are living in poverty, crime rates are falling, infant mortality rates have diminished, and world literacy rates are expanding. Humans continue to innovate, improve, and grow.
Our World In Data is a great site to review just how much mankind has improved using robust data.
Just as humans have progressed, the great companies of the world have also found a way to innovate, grow and create value for their stakeholders and society at large. Human improvement leads to greater consumption, while productivity improvements lead to increasing profits. Larger profits lead to higher stock prices. Like anything, progress happens over time and it does not happen all at once – there are peaks and valleys on this journey. In the short-term, there will be years where human progress slows, or even declines. Similarly, stocks experience dramatic periods of temporary decline, on the way to permanent gains. Over very long periods of time, companies innovate and grow, just like humans. After all, companies are made up of nothing more than the people who innovate and grow within it.
Our Philosophy of Investing contains 10 pillars. The first two are as follows:
Long term investors understand that there is also a direct correlation between time horizon and the predictability of investment markets. Specifically, the shorter the time horizon, the greater the unpredictability of market behavior. The enclosed chart displays the annualized returns of the S&P 500 Index over rolling periods (10 years, 20 years, 30 years & 40 years) – excluding dividends. The green line represents 10-year periods, while the blue line is 40-year periods. It becomes clear that as your time horizon expands, the variability of return becomes smaller.
The chart on the below demonstrates how the most recent rolling 20-year period stacks up to historical returns. During the last 20-year period, the annualized return of S&P 500 Index price return (excluding dividends) is 4%, while the average is 7%, so it appears that the last 20 years is well below historical averages. At the same time, we believe that over the last 20 years, there have been major advancements in technology, communication, medicine, etc. It is undisputed that humans have advanced in the last 20 years, which leads us to be optimistic about the possibility of favorable ‘market’ returns.
Investment Market Returns for July
While the Global stock market in July was flat, up by only 0.3%, there was significant divergence between Domestic and International stocks. Can you guess which market led the way? And which markets declined? If you’ve been reading our market commentary over the last few years, you will have noticed the trend of Domestic stock markets outperforming International stock markets. This trend remained true in July as US stocks were up 1.4% while Developed International and Emerging Markets were down (-1.3%) and (-1.2%) respectively. This most recent monthly performance continued these longer term return trends. Over the last 12 months, US stocks were up 8.0% while Developed International and Emerging Markets were down (-2.1%) and (-2.2%) respectively. The bond market was basically flat in July and commodities were negative (-0.7%).
We continue to draw your attention to the positive long-term results for all asset classes. To be a successful investor, you must keep a long-term perspective and accept the intra-year gyrations that come with owning risk assets.