1,982% Return: Are You Willing to Do What It Takes? | AWM Insights #132
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Episode Summary
In business and sports, everyone dreams of the payoff. A company that sells for billions and an athlete that signs the big contract. Yet, every owner and athlete who has achieved this will tell you the sacrifice and resiliency it takes to survive the gauntlet of the journey.
1,982% cumulative return over 30 years.
9.2% annual return
$1 invested grows to $20.82
We all want the payoff. Few will do what it takes.
Are you prepared & willing to?
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The purpose of investing is to put your money to work and build wealth. The growth potential of investing is primarily due to the power of compounding and the risk-return tradeoff.
To capture the returns above, you had to stay invested when every fiber of your being was telling you to get out.
-49% annual return in 2001
-57% annual return in 2008
-34% annual return in 2020
It’s what I imagine an ironman athlete feels like when they get off the bike to realize 26.2 miles stand between them and the finish line.
Returns are not given. They are earned.
2022 is testing our convictions. As of 10/14/2022, the S&P 500 return is -24.43%
The most common question is: can’t we avoid the pain? Don’t we know what’s coming? For instance, the current inflationary environment won’t last forever. Should we be on the sidelines until things return to normal?
Here’s the thing, this time is normal.
This is a well-functioning market. It's doing exactly what it should be doing. Lots of uncertainty, high inflation, things are changing, and the markets reacting, all those things are normal.
Even if we can reasonably know what the future may look like, markets remain unpredictable in the short term.
There are 10,950 days over 30 years. Missing less than .5% of the days can be catastrophic.
$1 invested in the S&P 500 on Dec. 31, 1991, and held the position until Dec 31, 2021, grows to $20.82 for a 1,982% cumulative return.
However, if you missed the 50 best days, you would only have $1.62.
It’s not enough to want to stay invested long-term, it’s having the capacity to do so.
The biggest mistake we see amateur investors make is not having an adequate amount of money set aside to provide for their essential priorities (expenses) over the next few years. Without this protective reserve, they are forced to panic and sell out of the market and turn what should be temporary unrealized losses into permanent losses.
At AWM, we are evidence-based investors. The history of the markets tells us we should expect short-term periods of temporary declines, which is why we build your financial structure with a protective reserve. Your protective reserve allows you the capacity to meet your short-term priorities and remain invested for the long term giving you the best opportunity to capture the returns you deserve.
As advisors, this is not just the advice we provide to our clients, this is how our families’ financial structures are built. We are in the trenches by your side, watching our investment balances temporarily decline. The confidence we have is that when times were good, we were building our bunkers to weather the storm.
We encourage you to do what it takes. It’s never a comfortable straight-lined journey, but staying the course is how you secure your family’s future.
DISCLOSURES
Source: Portfolio Advisory Group
This information is for illustrative purposes only. Data is not inflation adjusted and is derived from the S&P 500 index from 1/1/1991 to 12/31/2021, including the reinvestment of dividends. Investing involves risk including the risk of principal. Investments cannot be made directly in an index. This does not represent the performance of any AWM portfolio and past performance of the index is no guarantee of future results.
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+ Read the Transcript
Brandon Averill (00:03): Well Justin we're back for another episode here and got another bottle of wine. For those of you that are listening just for the wine pick we'll get that out of the way. End of the summer here so we're going to go with a little rosé.
Justin Dyer (00:17): There we go. Love it.
Brandon Averill (00:18): Rosé from France. We got her from Sancerre, LaPorte Rosé de Pinot Noir. We'll enjoy this and we'll put a link to it in the show notes, but cheers buddy.
Justin Dyer (00:31): Cheers.
Brandon Averill (00:31): It's your birthday too, so happy birthday.
Justin Dyer (00:34): Thank you. Thank you.
Brandon Averill (00:34): We'll let him take the bottle home for the rest of the day.
Justin Dyer (00:36): And no one has to know what time it is.
Brandon Averill (00:38): Yeah, right. One thing about this wine I did notice is, I think it was a couple bucks more expensive when I went to the wine store. Maybe that's inflation kicking in?
Justin Dyer (00:47): There you go.
Brandon Averill (00:48): What do you think?
Justin Dyer (00:48): It's a hot topic.
Brandon Averill (00:49): It is a hot topic and that's where I'd love to just start and start getting your feel. What the heck's going on? I was listening earlier and one of the big things about inflation is, it's actually taking over the top spot on the election cycle. Which we got a very controversial, and we're not going to get into politics, but abortion's a big issue for this upcoming midterm elections. But I mean inflation's just taking the cake here. So what's happening? Obviously it's impacting the market. I thought we should have maybe brought whiskey to this conversation given the ups and downs of the market. It's been at times painful. Then the market's roaring this morning, so the rosé makes sense.
Justin Dyer (01:33): There we go. Yeah, a little celebration. Let's see how long it lasts.
(01:37): I mean the short of it is inflation is dominating the news cycle and has really dominated the news cycle for the better part of this year. It's definitely going to be a big component. I shouldn't say definitely, it can never say anything with great certainty. It's going to likely continue to be a big factor or topic within the upcoming election. It's interesting too, it's not unique to the United States by any stretch of the imagination. Actually the United States has slightly lower inflation than the rest of the world. It's not unique to us and our economy. That being said, it still is an important topic and important topics generally bleed into the political spectrum more often than not.
(02:18): It's hard to pinpoint exactly why inflation happens. I mean you could, and you probably will hear, if you do some general searching, "Hey, we pumped a ton of liquidity into the system throughout the pandemic and solved a lot of potential problems." I think it's very fair to say that. You're not going to get too much pushback around that. Solved a lot of potential problems at the pandemic. Closures, work from home, whatever it was that came about with the pandemic to try and quell the pandemic. We tried to plug that hole with a ton of liquidity. Both the government writing checks, the Federal Reserve trying to stimulate, keeping interest rate low, et cetera. That amount of liquidity, just think an amount of dollars in the system. You have an increased number of dollars chasing a relatively finite amount of goods. That's one part of it.
(03:12): Then you have all the complexities around supply chains. Think about China. They're still going through this today where if they sniff some sort of covid outbreak they're still locking down the cities, which significantly impacts manufacturing, which just has this whole bottleneck. Or domino effect is a better way to think about it. Domino effect through the supply chain. Our supply chains were, and still largely are, what was called "just in time" focused. One little hiccup in that entire chain creates a ripple effect for many, many years or many, many periods, however you want to think about that, to come. Those two big factors plus now we have the war in Ukraine. These all come together and it's not surprising that we're seeing inflation. I think there's potentially an argument. This is where I'm going to get out and somewhat predict the future. Making an actual decision based on this prediction is a whole nother conversation, which we don't do, but you could see a likelihood that inflation comes down somewhat quickly.
(04:16): I don't know if that's going to be next month or the following month or what but if you just think about it logically all of that additional money supply dry powder has largely been eaten up or spent into the economic system. The cost to ship a good from China to the west coast is essentially back down to where it was in the early days of the pandemic. Pre-pandemic levels. Obviously the war in Ukraine is still ongoing and that's a big wild card at how long that goes. That's driving oil prices up. There are some countering forces here but you could see the kind of traditional factors that go into this inflation equation somewhat ease in the near term. Again, predicting the future is a fool's errand, but logically it's fun and interesting to take a step back and think through it.
Brandon Averill (05:10): Totally. I think you and I were talking about this at one point in the last few weeks. We had heard somebody talk about this is just the normalcy coming back to roost to an extent. We went through this period of un-normalcy for so long. So much money in this system, so much stimulus going on, some different things. That is the role of the Fed, it's the role of the government, to come in and buffer some of these situations in very complex ways. It's way too simplified. We avoided a lot of pain for a long period of time. We kept things artificially low, probably, on the interest rate side and it fueled growth. Now we're starting to have a reversal of some of these things. Like you said, it's not surprising that these things are starting to happen.
(05:59): I think the tricky part, obviously, if you were trying to play this as an active trader is when the heck is this happening. We know people that we talked to 10 years ago that predicted inflation running away and all this stuff happening. And that was 10 years ago. So to actually figure out when to implement and when to go. I think I heard another stat this morning on how timing and how the market prices these things in. It's tough to get ahead of them is seemingly this sentiment and I think we all agree. Hey, inflation may come down, but there's probably some short term pain coming. When you start to look at it, that's what the market's expecting. So unless we have a divergent, it's one way or the other, you don't really have an advantage. We see that even in mutual fund right now. The cash position within mutual funds typically around 1%. I think those have ballooned to two and a half percent.
(06:57): These strategic "active traders" have made the decision to take some risk off. Now they have the really tough task of trying to figure out when to turn it back on. I think that just goes back to missing the days. There was a stat that ran across my Instagram feed the other day. It was talking about if you invested a dollar in the S&P 500 at the end of 1991, December 31st, and you held that dollar in the S&P all the way till the end of 2021, December 31st, 2021, that dollar would be worth $20 and 82 cents. A 2000% increase over that period of time. 30 years is a long time, right? You saw a lot during that 30 year period of time. You saw the tech crash, you saw 9/11, 2008 crisis, a lot of things. The stark and amazing thing is just 50 days. Think about that. 50 days in 30 years. If you miss the 50 best days, your dollar would be worth a dollar 62. Trying to time the stuff. Shoot man, God bless you if you can figure it out. But we haven't seen anybody could do it.
Justin Dyer (08:10): Totally. It is easy to look at that data. We love looking at that data and we will. We'll always go back to that and say, "What does the data say?" Just this week along those lines there's an article in Bloomberg I have up now around hedge funds underperforming. These are supposedly the wizards of timing and "predicting the future". And they are underperforming. Flows are coming out of it. That's the data we go back to. There's also the behavioral side of it and we always have to acknowledge that. "Hey, if you look at a long term chart, you look at the numbers that you're throwing out, it seems easy over long periods of time." And we don't want to have that conclusion. Periods like today, or this year, 2020 at large, they're hard to go through. They're full stop. They are.
(09:06): Acknowledging that, knowing that there's a psychological reaction, everyone has it, it's totally normal. But trying to take a step back after that acknowledgement and say, "Okay, well what does this mean for the future? Do I have the right structure in place?" That's always where we're going to go back to. It's been proven that's largely what you're saying in those numbers. That's where it proves staying power and discipline and all that stuff really, really matters over the long term.
(09:35): I really want to make sure we hit it home that there's an acknowledgement that periods like this are hard to go through. They're hard to go through for us too. We have the training, the comfort, the experience to say, "Well hey, this is actually normal." It absolutely sucks to go through it. I want it to be over tomorrow. Sometimes I'll optimistically try and put some energy out there to make it happen. We know that's not going to necessarily move the needle one way or the other. Just knowing that there's a process in place gives us that confidence to have these conversations and really look forward to the future and know that staying the course, having the right structure in place is the high likelihood, high probability, way of going about investing and managing finances.
Brandon Averill (10:30): I was talking with somebody from one of the funds that we actually use and they were talking about hopefully people aren't paying attention as much as normal to the markets because then you're saving yourself some of this grief. For those people that are watching the markets and watching the roller coaster its gut wrenching and it's confusing. There was an anecdote talking to this representative from one of the managers. They have some data that's showing what's happened with the bond market and the stock market. This is very close to the same amount of pain that was felt in 2008. It doesn't feel that bad sitting here today. I think, "Wow, 2008 seems pretty bad." The market's acting in a way and having that kind of impact right now.
(11:26): I think to your point, where we get comfort is that probably a lot of people on their own aren't going to be looking up and reminding themselves that a 30 year period when you stay disciplined is going to reward yourself. It is a good reminder when you're going through periods of time like this to do what we do. It's why we look up these stats. Because we need to remind ourselves, "Hey, don't get emotional here." This is a well functioning market. It's doing exactly what it should be doing. Lots of uncertainty, high inflation, things are changing, market's reacting, all those things are really normal. Then we just have to go back and continue to remind ourselves about the data and what the best investment experience is going to be for our clients. That's going to be aligning their priorities with when they need the money so we can appropriately allocate it. If you're taking your money that you need next year and you're allocating it to this crazy market right now, you should be a ping pong ball right now.
Justin Dyer (12:25): You put it in you're Robinhood account a year ago?
Brandon Averill (12:29): It's probably a mess. In that case don't close your eyes. Look in there and find some help. I think that's just a good reminder. This is a tough time right now. The more we can remind ourselves that it is about the long term if you have the right financial structure.
Justin Dyer (12:46): It is. I think I hit on this a little bit last week, also acknowledging that the market is not the economy. That acknowledgement, or that understanding, can go both ways. Right now, the market's underperforming the economy overall. The economy is doing okay aside from inflation. Jobs. The jobs numbers are still growing, slowing down a little bit, but still very, very strong. Which is why the Fed has confidence and comfort in continuing to increase interest rates. Earning season. This is where it starts to bleed into the market or the stocks and companies specifically. Different but they're related for sure. Don't confuse the two, but earning season's coming around the corner. 20 companies have reported, 12 of those companies have actually beat estimates, meaning they've outperformed expectations.
(13:42): The market takes those expectations into account when it's pricing where it is. More than half had outperformed. That's around what you would expect, so to speak, in a normal market environment. Earnings, this is a big caveat, we're early in it and so far have not fallen off a cliff or anything like that. In fact the broad expectation is for a little bit of growth quarter over quarter. Just think about that. The market movement is different from economic performance. They can be related over longer periods of time and that certainly is a relationship that is worth taking into account. Market prices can move very, very differently than what's actually happening in the economy.
Brandon Averill (14:32): Totally. I think a good reminder. Things are still happening. I mean, Elon's still buying Twitter. Well, after a long back and forth. I guess the ink hasn't dried.
Justin Dyer (14:44): I'll believe it when I see it.
Brandon Averill (14:46): We saw TripActions is raising a hundred million bucks. There are things happening is the point. Really good companies are still thriving, they're still growing, they're outperforming. We hear it on the private side all the time, there's a little bit more caution which I think is a good thing. We're actually looking at profitability and cash and balance sheets and some of the exuberance might be kind of drying up, but I think that's a good thing long term as well. At least what I'm taking away from this conversation is, it's tough. It's tough, period. It's tough to turn on the news every day and see, well shoot, is the market down 2%? Is it up 2%? What the heck's going on? Scanning back out and really relying on, "Hey, if I built my structure so that I've identified the things that are really important to me, those priorities, and then my portfolio is allocated to those priorities, I should have a lot of confidence in what's going on."
(15:46): The things we focus on is the zingers. I'll give you just one zinger for anybody listening to use this week and it's that stat I went through, the dollar invested in the S&P 500 at the end of 1991. Ask your friends, ask your teammates, ask the people around you, "Hey, what do you think that dollar's worth at the beginning of this year?" The answer's $20 and 82 cents. Pretty remarkable. Then the punchline, "Hey, what if you were a trader? You thought you could predict the future and you missed the 50 best days. What do you think you got?" The answer's a dollar 62. I know I'm more analytical, but that's pretty darn convincing.
Justin Dyer (16:29): It is. I would just add to that you had to go through periods. We're looking back at actual data. You had to go through periods like we're seeing this year. The last couple weeks specifically to actually get that. Unfortunately, that's the pain that you have to experience to get the reward.
Brandon Averill (16:50): Yeah, definitely. Well as most people listening know, you've heard me say it before, but shoot us a text and we'll get you. You're probably listening to this in the car on a run. We'll actually shoot you a text with those exact stats so you can accurately quote it. To get on that, just shoot me a text, six zero two seven zero four five five seven four. We'll shoot that over to you. Would love to hear any topics that are top of mind for anyone and we can tackle them in future episodes. But until next time, own your wealth, make an impact, and always be a pro.