By Richard Bernstein, Chief Executive and Chief Investment Officer, Richard Bernstein Advisors
We wrote a white paper in November 2014 titled “Tired of being scared yet?”. We outlined 50 different topics investors consistently cited at the time as to why the stock market was very risky. Investors’ fear over the past several years led to near-historic flows into bond ETFs and bond mutual funds and, until more recently, outflows from equities. However, the S&P 500® returned 10.2% per year versus bonds’ 1.5% from November 2014 to May 2018 (see Chart 1).
Investment decisions should not be based on whether there are reasons to be scared because there are always reasons to be scared. Rather, investors must assess potential returns versus that ever- present fear. Successful financial investment and corporate capital investment has always depended on insightful risk/return analysis.
CHART 1:
S&P 500® vs. Bloomberg Barclays US Bond Aggregate Nov 30, 2014 – May 31, 2018
Source: Bloomberg Finance L.P. For Index descriptors, see “Index Descriptions” at end of document.
Today, investors seem bombarded with a daily flow of “hair on fire” events. Whether it is trade, international relations, oil, emerging market problems, interest rates, or many other issues, it has become extraordinarily difficult for investors to sift through the incessant noise to uncover true investment information.
Reading Twitter posts and reacting to every news event every day seems to us at RBA to be a sure route to investment
underperformance. We prefer to stay disciplined and dispassionate, and invest based on fundamentals rather than noise.
One antidote for noise
It seems hackneyed to suggest that longer investment time horizons are beneficial to investment returns. However, it is
true. The data clearly show that rapid-fire trading leads to inferior performance. Chart 2 shows the probability of a negative return for the S&P 500® for varying time horizons. The probability of losing money uniformly decreases for each longer time horizon.
CHART 2:
Probability of a Loss for the S&P 500® (Rolling Price Returns, Jan.1930 thru May 2018)
Economies simply don’t change day by day. Therefore, risk decreases as one extends investment time horizons probably because longer time horizons allow fundamentals to develop, whereas short-term investing is largely based on meaningless noise.
Chart 3 compares the performance of “event-driven” strategies to that of global equities. Over the last five years, event-driven strategies have returned 1.2% per year versus the MSCI All Country World Index (ACWI) return of 9.5% per year. Chasing events certainly hasn’t been an outperforming strategy.
One might suggest that event-driven strategies protect against down markets. While that might indeed be true, Chart 2 pointed out that stocks provide negative returns only 31% of one-year periods and only 20% of five-year periods. One needs to remember that overall fundamentals improve more often than they deteriorate.
CHART 3:
HFRI Event Driven Index vs. MSCI ACWI Index May 31, 2013 – May 31, 2018
Source: Bloomberg Finance L.P. For Index descriptors, see “Index Descriptions” at end of document.
Ignore the tweet. Invest for the meat.
Watching daily events unfold is always mesmerizing, but the data show that it is extraordinarily difficult to invest fruitfully attempting to time short-term events. At RBA, we try to stay dispassionate and disciplined and we extend our investment time horizons because the meat of the investment matter is fundamentals and not the hair-on-fire event of the day.
To learn more about RBA’s disciplined approach to macro investing, please contact your local RBA representative. www.rbadvisors.com/images/pdfs/Portfolio_Specialist_Map.pdf.