Market Timing Is for Suckers, and So Is Going 'Risk-Free'

What does it take to be a true contrarian investor? Common sense tells you it means going against the crowd. In the 1960s the average holding period for stocks peaked at a tad over eight years. A typical portfolio might have turned over about 12% each year. By 2010, the average holding period had dropped to only about seven months. That implied around 58% in annual turnover. I couldn't find more recent data, but it certainly seems like the typical holding period has dropped even further since, possibly to just three or four months due to excessive amounts of day-trading. Based on that, being a contrarian investor requires making long-term commitments rather than TYAO (trading your (butt) off). The great majority of today's investors can take the data that follow as indicative of asset class returns over their entire lifetimes. Stocks were typically the most volatile class to hold. Short-term T-bills were the least volatile. Conservative types craved the guaranteed principal payments and risk-free nature of both T-bills and 10-year T-Bonds. Slightly braver fixed-income investors were willing to own investment grade corporate bonds in order to capture higher coupon rates. The Jan. 1 of 1928 starting date for the study was an inauspicious one for equity investors. The Crash of 1929 and The Great Depression came on its heels. Five of the six years from 1929 through 1932 showed losses for the S&P 500 with dividends included. By year-end 1932 each $100 invested in the S&P 500 had shrunk to just $50.16. At the end of 1937 that same $100 investment was still underwater at a cumulative value of $94.00. On Dec. 31, 1939 each $100 had only risen to $120.20 after a dozen years. World War II was initially tough on stocks, but that turned around during 1942 through the end of the war. The 1950s closed the book with large gains. Intrepid long-term holders of the S&P 500 saw each initial hundred bucks worth about $1,609. The 1960s and 1970s were a bit choppy. 1973 and 1974 proved to be big losers due to the OPEC oil price shock. Nevertheless, the original $100, left alone to compound in the S&P 500, grew to a very nice $6,023. Those who had faith in equities over the next two decades had to be impressed with their wise choice of assets class. The tech/internet bubble was in full swing and yet to deflate. Every $100 deposited in early 1928 was then worth a staggering $156,658. Results in the 21st century so far have been all over the place. The first three years saw three straight negative returns as the technology craze crashed and burned. 2008 marked the start of America's most recent financial crisis. The S&P plunged by 36.55% that year. The Covid-crisis in March of 2020, which continues today, initially set stocks reeling due to massive government-imposed business shut-downs. Despite all those challenges, stocks performed brilliantly on balance. People who plunked down $100 back in 1928 saw its value climb to an astounding $761,711 on Dec. 31, 2021. A 93-year holding period is beyond most of our own time horizons. It is instructive, though, to compare how ultra-conservative folks and middle-of-the-road fixed income owners did compared with the risk-takers who were willing to live with volatility. Short-term T-bill owners pocketed just 3.28% on average. Their original hundred bucks grew to only $2,083. That likely left them losers in after-tax, inflation adjusted buying power. Those who chose 10-year treasury paper did a bit better, averaging 4.81% annualized. Taking a modicum of risk by using corporate paper paid off compared to the guaranteed safety of government bonds. Those people benefited from the high interest years from the late 1970s through the mid-1980s. Each original $100 turned into greater than $54,230. Accepting variation of returns and staying the course with equities really paid off. Instead of losing true purchasing power, or barely keeping above inflation, equity holders got very, very rich. This year's horrendous start probably scared a lot of traders into selling out chunks of fine equity holdings. That type behavior is what derails long-term hopes for great retirements. Imagine how many times buy and hold investors would have been tempted to do that same thing since 1928. Market timing is for suckers. Nobody knows the bottom until it is clearly in the rear view mirror. The easiest money is always made in the earliest days following key turning points. What are the key takeaways from all this? Over the long haul equities outperform fixed income by wide margins. The more conservative investors go, the less they make. Treat major market selloffs as gifts, not punishment. When everything is going down at once it is unlikely that your holdings are really less valuable than before the plunge. Stop trying to short-term trade. Avoid shares of crappy firms that have never made money. Buy shares in solidly profitable companies when their valuations are depressed. The give them a chance to work. I typically expect to hold stocks for at least six to 18 months to allow for reversion-to-the-mean recoveries. There's nothing wrong with taking profits on stocks which get expensive. Just recycle your capital into other names that appear more tempting valuation-wise. Staying fully invested in stocks will likely reward you by multiples of what you'd have if including fixed income in your permanent portfolios.

Market Timing Is for Suckers, and So Is Going 'Risk-Free'

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