If you’re looking for a benchmark time to review and revise your long- and short-term investment strategy, midyear is a fine candidate. Right about now is a good time to look ahead by looking backward. Not a few months back or even years, but several centuries back — to 1492, specifically. Or 1513. Or 1534. Those were the years when Europeans made significant discoveries in the New World. What does this have to do with investing in the 21st century?
Investing for your future is a journey. The most important part of any trip is starting off in the right direction. If you live in Atlanta and want to visit New York, you’ve got to head north, or you’ll never get to the Big Apple.
The important European explorers had one thing in common: They sailed west. Some, like Columbus, went southwest and hit the Caribbean islands. Others took more northwesterly courses and “discovered” places like Virginia and Newfoundland. Eventually, it became clear there was always a nice payoff if you headed west.
Such payoffs required months of staying the course across a vast and uncharted ocean — regardless of terrible storms, horrible food and deadly diseases.
As an investor, you need to have your own long-term charted course to reach a New World of financial security. You don’t have to chart out every mile and day of the journey, but you should map the big picture — the principles that will guide your voyage.
Wouldn’t it be nice if there was a “West” in investing — a general direction that offered the promise of success? While that remains a dream, it is possible, based on historical data, to identify trends that might point our portfolios in the right direction.
Here are some historical trends and cycles that are important for investors to understand as they look to “head west.” We are going to explore three important asset classes (stocks, bonds and commodities) that an investor can harness, and look at the cycles they have historically gone through.
The NDR Group, a research firm, in our opinion, has done an excellent job of detailing what these cycles look like. Identifying past cycles can give investors a good sense of where we stand now, and what the next several years might look like for each of these major areas. As always, past performance is not always indicative of future results. However, recognizing these patterns can give us a better idea if an asset class has a rosy long-term outlook, or not.
So, let’s examine these cycles. Then look at your portfolio to see if you have the right overall direction punched into the guidance system of your 401(k), IRA and other investment accounts.
Stocks: Stocks, using the S&P 500, work in long-term patterns of about 15 years. The average for long-term up trends is about 17. Down trends are similarly long. Secular bear markets average about 12 years, inflicting about a 4 percent loss per annum.
Secular bull markets average about a 15 percent gain per year. And right now, we are just shy of nine years into one of these long-term bulls. So, we may well have several more years left before this bull is completely worn out.
Bonds: Bonds, measured by government bond yields, work in even longer patterns. Close to 30 years. Here we must remember that the interest or payments we receive from bonds are always a positive contributor to our fixed income holdings. However, bond prices will fluctuate either up or down, depending on the direction of interest rates. And since bond prices move inversely with interest rates, when rates move lower, bond prices will have a tailwind. When the general direction of interest rates is upward, bond prices will face headwinds. That being said, we likely just started a bond bear market. The summer of 2016 saw some of the lowest 10-year government bond rates on record and have moved generally higher ever since. If this trend continues, bonds will be in for a long slog.
Commodities: Commodity cycles, driven heavily by the price of oil, are right in between stocks and bonds, running between 15 and 20 years. Commodity bull markets average an 8.4 percent gain per year. Right now, we are in year eight of a commodity bear that began in 2010, so we are about halfway through an average cycle. However, the average commodity bear pullback is 51 percent, and many areas of the commodity complex already surpassed that drop by 2016. This may indicate that we are closer to a bottom in this cycle, with more flat, rather than down, years ahead.
So, as investors look to head west in the coming years, based on the market cycles we discussed above, the compass seems to direct us toward owning quality stocks that can be held for the long term, and perhaps purchasing high-quality bonds with shorter-term maturities. As for commodities, investors should consider being patient with this sector as they continue to look beyond the horizon.
The original AJC article appears here.
This information is provided to you as a resource for informational purposes only and should not be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. There is no guarantee offered that investment return, yield, or performance will be achieved. There will be periods of performance fluctuations, including periods of negative returns. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.