Wednesday, June 10, 2020

Bob And Staying Long Term

If you do not know Bob, he is our sample investor who started off passive investing through ETFs following the balanced Bedokian Portfolio allocation (35% equities, 35% REITs, 20% bonds, 5% commodities and 5% cash, see here) starting from 1 Jan 2017. He rebalances his portfolio every six months with SGD 5,000, usually at beginning January and end of June. After close to 3.5 years, as at 9 June 2020, his overall time weighted returns are at 13.11% (based on calculations from StocksCafe) to date.

We had seen the fall and subsequent rise of the equities’ and REITs’ prices between end February till now, and some of us may have entered during the lows of end March. Notwithstanding the concerns on the disconnect between the markets and the economy in general, you may have wondered if Bob had bought in during that down-down period, he would be getting a better bargain than at his scheduled upcoming rebalancing date of 30 Jun 2020. As an active investor, naturally I would have felt a sense of waste and opportunity cost imposed, but we know emotions are a no-no in the world of investing and trading, so we just looked back, sigh and moved on (I called this moment “the one that got away”, but honestly I did get some counters on the cheap during that period). 

For Bob, since he is only looking at his portfolio once in a while, I guess he may have other more pressing concerns during this time, such as worrying for his job, the safety and well-being of his family and coping with the isolation and boredom resulting from the circuit breaker measures. Of course, Bob might have heard from his social media channels and friends about the stock market, and the fear and opportunities that come with it. Probably he is just taking it in his stride and believe in the long term.

The Long Term

And this is precisely what I am going to talk about. Investing is meant for long term, and by my definition it is a period of at least 10 years. Ups and downs, peaks and troughs, are part and parcel of the market and economic cycles, and over the long term you are likely to get overall positive returns. During the timeframe of Jan 1994 to Dec 2019, using the balanced Bedokian Portfolio with U.S. based asset classes, a USD 10,000 investment, rebalanced annually, will return USD 50,145 (inflation adjusted). If we look at the 10-year rolling returns, it resulted in a range between 4.92% and 11.58%, with an average of 8.36%1.

Let us stretch a bit longer using only U.S. equities and 10-year treasury bonds (60%/40% respectively), from Jan 1972 to Dec 2019, an initial USD 10,000 (rebalanced annually) will return USD 130,424 (inflation adjusted) and the 10-year rolling returns were between 3.32% and 15.69%, averaging at 10.29%2. The figures were considered not bad, as there were a number of economic crises in those years besides the all-too-familiar Dot Com Bubble and the Global Financial Crisis (e.g. 1973 Oil Crisis, 1987 Black Monday crash, etc.).

When you look at the graphs and charts of equities, REITs or maybe bonds, first by the day, then by the week and the month, the peaks and valleys are pretty obvious, but if you continue to zoom out by a year, then five years and then ten, chances are you will see an upward slope, generally. This is what you want to achieve for your portfolio; the gain in price and value. These are made possible because of two important and simple factors: the inherent growth of the economy and the power of compounding. 

Using the world’s gross domestic product (GDP) as an indicator of economic growth, since 1961 till 2018, annually it had always been a positive percentage growth with the exception of 2009 (see Fig. 1)3. If this GDP is an investible financial instrument, you can see the compounding effect work over the years.

Fig.1 - World GDP growth (annual %), 1961 - 2018. Source: World Bank

Therefore, in investing, stay calm and long term, and be diversified.

1 – Statistics from Portfolio Visualizer (, using Backtest Asset Allocation. 35% US Stock Market (equities), 35% REITs, 20% Total U.S. Bond Market (bonds), 5% Gold (commodities), 5% cash. Starting year of 1994 was selected as it was the earliest year with REITs data.

2 – ibid. The U.S. Stock Market and the 10-year Treasury bond were selected for the equities and bond components respectively, since these two contained data from 1972, which was Portfolio Visualizer’s earliest data point year.

3 – GDP growth (annual %). The World Bank. (accessed 9 June 2020).

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