Enhancing Your Long Term Returns
Long term returns should be our goal, as investors.
I read a very interesting Bloomberg article (link no longer available), prompted by the collapse in the Greek stock market, which is down some 85% from its 2007 highs. The article discussed prior calamities as far back as 1929 but it also highlighted three other important aspects worthy of consideration:
- Some bearish events are swift and sudden, such as the 1987 crash. Not much one can do about something like that. Most however, such as the ones outlined in the article, tend to be slower rollovers that take many months and years to take hold. To some degree these can be avoided, which we’ll discuss below.
- Bear markets can be divided into two categories. Take a look at Greece, Ukraine, Iceland and the well known example of Japan. These economies have entrenched structural issues which have prohibited recovery, whereas Russia, Thailand and the US have overcome their issues and managed to recover.
- Being overly exposed to either of these scenarios can drastically dilute the long term returns of an investor. It’s a mathematical fact that simply avoiding these scenarios, where possible, will ensure your return is better than that of a buy and hold investor.
Let’s use a real time case study, specifically the Growth Portfolio. The goals of the Growth Portfolio are simple; to keep you on the right side of the market, grow your capital over the longer term, and to do so with minimal effort and workload.
The following table shows the annual returns of the Growth Portfolio¹ (July 2015) vs. the All Ordinaries Index (ex-dividends).
The Growth Portfolio had a total return of 55% vs. the XAO of -2.1%, a significant outperformance. However, what happens if a buy and hold investor could somehow defend their capital in 2008 just like the Growth Portfolio did? In the ‘XAO Adjusted’ column let’s hypothetically adjust the 2008 XAO return from -43% to -6.92%, the same as the Growth Portfolio. By doing this the Total Return of the XAO is now aligned to that of the Growth Portfolio. This simple exercise, specifically being proactive with managing downside exposure, has greatly enhanced the long term upside and long term returns.
Read more about the Growth Portfolio and see if it is suitable for you.
¹The Growth Portfolio returned 41.7% in 2006 vs. the XAO of 8.39%. I have removed this data for this exercise to better show the point of the discussion.
