Returns are measured relative to inflation. Here is the key:
For example, if you invested in 2000 and withdraw your money in any year since you would have made less money than inflation. Investing in 2008 and 2009 though has generated nice returns. Investing in any other year since the mid 1990s has resulted in negative to low positive returns. And that's the period I have been investing in...
Returns seem to move in waves, shown by the red and green patches on the chart. Maybe we are entering a new wave of positive returns? It would be nice to think so!
2 comments:
It also looks like where an investment was made in a year that produced below-inflation returns for a couple of years, you often would never finish with overall returns above inflation no matter how long you waited. On the other hand, if you had several good years at the start, holding on for long enough saw the overall return reverting to the mean.
So, if you're lucky to get well ahead of the long-term average result after a while (like I was in 2007), it might be a good idea to cash in your stocks and move into bonds and term investments...
Might be interesting to model an stock investment strategy where you invest an equal amount each year, and track and manage each annual 'parcel' of shares. If a particular years investment ever gets more than 1SD above the long-term average return, sell it and move the proceeds into fixed interest. The other 'underperforming' annual parcels would continue to be held, allowing them to recover in the longer term rather than locking in losses. Like all models, past performance would not guarantee future returns. But I'm sure it could be turned into an investment book if it had a catchy enough title ;)
If each year's parcel is invested in the same general portfolio of stocks then I don't think there are any gains to the algorithm you suggest and when considering capital gains taxes you'd actually want to sell losing ones instead! Just rebalancing the whole portfolio might make sense or something along the lines of Mebane Faber's strategy but on a longer time frame than the trades between assets that he suggests.
Post a Comment