January 31st, 2015
by Rob Isbitts and Vincent Esposito, Sungarden Investment Research
Every mutual fund ad says it in some form: past performance is no guarantee of future performance. Why then, are we constantly bombarded with investment market tendencies that have occurred since 1926? That's the year the esteemed Ibbotson Company (now owned by Morningstar) has used as the starting point for investment asset class tracking. It has become industry standard.
We too have analyzed this 90-year period from many angles, looking for insight into what the future may bring. As we stated in a recent blog, we are sick of looking at past data on very long-term market performance. And you should be too. Why? Because the financial advisory industry is using those long time periods to convince you of two things: that the future will mirror the past, and that if you give it enough time, you will be successful if you just leave your portfolio alone.
And so, as we begin 2015, we at Sungarden have a New Year's Resolution: to limit our analysis of past market trends to what we refer to internally (until now!) the "Modern Investment Era." To us, that era began around 1990. If you are reaching back to figure out about when that was, here are a few reminders:
- Saddam Hussein invaded Kuwait, and the U.S., led by President Bush (the first one) responded with Operation Desert Shield
- The global stock market fell sharply but did not stay down very long
- The U.S. economy entered recession
- East and West Germany reunited (and it felt so good!)
- The Simpsons made their national TV debut
- Microsoft released its new version of Windows. It was 3.0
- The Leaning Tower of Pisa was closed for fear it would fall over
- Home Alone, Ghost and Pretty Woman were among the most popular movies
- Ice Ice Baby was a popular song
The elders here (e.g. those of us over age 40) remember that investing before 1990 was a very different exercise than it is today. So, we think the past 25 years are far more relevant to today's investor than any time period much before 1990. Here are some of the biggest reasons why we believe this:
- Average holding periods as evidenced by the chart below, have decreased significantly
- Bond rates have declined dramatically (10 year UST was around 8% in 1990. As of end of 2014, it was close to 2%, and its been a steady decline).
- Individual investor participation in stock market has grown: in 1952, 6% adults in U.S. held stocks. By 1990 it was 25% (source for all preceding = NYSE). By September 1998 it had reached 60%. From 1999 through 2014, range was 52-66% (source from 1998-2104=Gallup).
- International investing is no longer considered "foreign" to investors. The markets and economy are more interdependent.
- The explosion of pooled funds (mutual funds, then ETFs) has made investing easier to outsource.
We think that most of what investors need in the area of historical reference points to consider are contained within the period from 1990 forward. For more on how this applies to our work at Sungarden, request "The Sungarden Study" at www.hedgedinvesting.com.