We took a more detailed look at the returns of the Essential Growth Portfolio℠ for the last several years, examining the trailing twelve months’ return at the end of each month. At the height of the bull market in 2007, the Essential Growth Portfolio℠ lagged the very strong returns of the S&P 500® by 700 – 800 bps. Conversely, at the depths of the bear market in late 2008 and early 2009, the Essential Growth Portfolio℠ lost 700 – 800 bps less than the S&P 500®.
This return pattern is exactly what we set out to achieve when we designed the investment process. A question we often get is: why does it matter so much to be down less if you are going to lag on the upside?
This a great question because the math is not intuitive. If my portfolio is down 5% and then back up 5%, I am even right? Well, almost. A $10,000 portfolio with the down 5%/up 5% pattern is back to $9,975. Not much difference you say. And we would agree.
But, if we take this example several steps further, you’ll begin to see the importance of minimizing volatility. The table below shows the two year, ten year and twenty year values of portfolios that are up and down 5, 10 and 15% each pair of years.
|Value of $10,000||Up 5%/ Down 5%||Up 10%/ Down 10%||Up 15%/ Down 15%|
|After Two Years||$9,975||$9,900||$9,775|
|After Ten Years||$9,876||$9,510||$8,924|
|After Twenty Years||$9,753||$9,044||$7,965|
Note: it doesn’t matter whether you are down first or up first in each pair of years, the results are the same.
You get the point -- the more volatile the portfolio returns, the harder it is to make back the losses. So, by trying to lose less, we also don't have to take greater risks to earn back the losses.
We believe this approach serves our clients' best interests. It may not be exciting but after the events of the last couple of years, less exciting sounds pretty good.