Monthly Archives: November 2016

Good Months & Good Days


November 28, 2016

At our annual Women’s Investor Seminar, I like to use several slides that illustrate our belief in the discipline of long term investing in the stock market. The slides and information are fairly straight forward; please, allow me to illustrate.

Here is the scenario: your Grandparents both invest $1.00 in the market in 1926, and then they forget about it. Grandmother invests her $1 in the stock market, as she was always told that is where growth was. Grandfather invests his $1 in the safer US Treasury bill market, because safety matters. Fast forward to 2009 and let’s see who has more money.

Grandpa’s $1 has grown to $20.53, but Grandma’s $1 is now worth a staggering $2,592.00! The group of women at this year’s seminar was surprised at this result, but what shocked them even more were the possible consequences of Grandma trying to do some trading.

If Grandma had traded in and out of the market, she would have likely missed some of the best performing months. If Grandma had been out of the market for the best 37 performing months during the period from 1929 to 2009, her $1 would have only grown to $19.66. In other words, missing the best 37 months of the market performance makes Grandma’s return worse than the return from US Treasuries. That’s pretty shocking, and it is a real demonstration of the power of staying the course.

I was glad to read a recent research report from Merrill Lynch’s equity team that reached a similar conclusion. The Merrill team did a study of the stock market by decade starting in 1930. They looked at price returns of the stock market for each decade, and calculated how an investor’s return would have been affected if they had missed the best 10 days of market movement in each decade. Surely being out of the market for just 10 of each decade’s 3,600 days couldn’t possibly be that dire in terms of performance difference… or could it?

Below are there results of Merrill’s work (returns exclude dividends):

Decade Return for Full Decade Return Excluding Best 10 Days of Decade
1930s -42% -79%
1940s 35% -14%
1950s 257% 167%
1960s 54% 14%
1970s 17% -20%
1980s 227% 108%
1990s 316% 186%
2000s -24% -62%
2010s 95% 34%
Since 1930 10,050% 31%

As you can see, the impact on investor’s returns for missing either the best 10 days, or the best 37 months, is quite shocking! Some investment lessons are very hard to understand, but this one strikes me as very easy, and yet the reality is many investors find it hard to practice. Investors that stick to their plan and truly practice a strategy of being a long term investor should take comfort in these numbers. On the other hand, market timers should perhaps take pause.

Carl Gambrell


New Fear In The Market – Bond Investing

123November 21, 2016

Bond investors are now facing a “one-two” punch with the bond market selling off on the long end, and the Fed about to raise short term rates for the second time in seven years. Is the long awaited decline in the bond market upon on us? How will investors react to the risks associated with this rediscovered world of rising rates?

Since 1981, the bond market has experienced a massive rally. Having been around in the market for a while, I can remember buying 10-year Treasury bonds at a yield of 16%! The 1980s were heady times for bond traders, and they were a bond investor’s dream. But a 30-year rally eventually saw that same 10-year government bond yielding a meager 1.37%. These ultra low interest rates have forced investors to turn to other investments for income. So we must pay careful attention to the way that the Presidential election result has catalyzed a potentially major shift in the bond market.

On election day, the 10-year Treasury bond was yielding 1.75%. The yield quickly moved to 2.25%, an increase of 50 basis points. An investor who bought the 10-year note on election day would have seen a drop in value of 4.5% in a week! If the 10-year Treasury moves further to a 4% yield, an investor who bought it for $100,000 on November 8th, would see it worth only $81,600.

Historically, the level of interest rates was driven by two interrelated factors. The Fed set short term interest rates in the form of its Fed Funds rates, and the market decided the level of long term interest rates. That was the norm for decades, but several years ago the Fed decided to work on both the short term rates and long term rates. The relevant policy is known as “quantitative easing” (QE), which was intended to help kick start the economy. Through QE, the Fed bought billions of dollars worth of longer term securities, and this pushed down the 10 year note, and mortgage rates, to all time lows. In effect, the Fed temporarily replaced the market as the arbiter of long term rates. The Fed’s QE program is now over, and it appears that long term interest rate levels are back in the hands of investors, but what do they see?

A new government is taking control, with promises of massive infrastructure projects for the nation. Also on the table are potential cuts in corporate and individual tax rates. All of this must be paid for, and it looks like investors are assuming that more government debt will be issued. It does not take an economist to work out that finding buyers for more debt will likely mean higher rate of interest on those new bonds. Getting through this new phase in the interest rate cycle will not be easy, and bond investors must be cautious and prudent during this time of adjustment.

Carl Gambrell