Revenge of the Nerds
The 2012 presidential election introduced the nation to Nate Silver and statistical polling. Brad Pitt’s starring role in Moneyball brought attention to Billy Beane and baseball’s use of sabermetrics. TV’s most highly rated sitcom is the “Big Bang Theory,” a show about physicists that embraces all things geek. What do these celebrated figures have in common?…The prolific use, and glorification of, mathematics to advance their crafts. Revenge of the Nerds has come to fruition.
Few areas scream out for statistics and probabilities more than financial planning and investing. Unfortunately, too many investors are influenced by sentiment and news headlines instead of by facts and figures when making decisions. We need to set aside our emotions and listen closer to our inner math nerd for guidance. Math will not provide us with all the answers, but will help us better frame the questions and establish expectations.
Taking a cue from the math geeks, here is a list of numbers and stats that may help bring perspective to today’s investment discussions. Realizing that many clients have sought your help due to their own aversion to math, we have steered clear of formulas and Greek symbols. All returns are as of February 28, 2013 unless otherwise noted.
- 0% – The current perceived equity return globally according to many retail investors. In fact, we are three years past the “the lost decade.” The last ten years have returned 10.2% annualized to global equity investors (based on the Russell Global Index). This is close to the long-term averages and much better than “zero.”
- ONE – The number of calendar years since 1926 that the U.S. equity market (represented by the S&P 500® Index) has returned between 9% and 10%. The annualized return for this 86-year horizon is 9.8%. The maximum calendar year return was 54%, the minimum was -43%. What’s that tell you? Averages can be deceptive and ONE year is way too short a time frame to base any investment decisions on.
- TWO – Almost 2x was the magnitude higher of the U.S. equity market Price/earnings ratio on January 1, 2000 versus where it stood on February 28, 2013 (29.7 vs 16.3 based on the Russell 3000® Index). U.S. stocks were very expensive at the end of the 90’s compared to today.
- 5% – The percentage of 10-year timeframes for which U.S. equity returns have been negative since 1926 (based on the Ibbotson U.S. Equity Index prior to 1979 and the Russell 3000 Index thereafter). It had been 68 years since the last occurrence prior to the 2008 correction.
- 11% – The 2012 calendar year return for a diversified 60% U.S. equity / 40% bond index portfolio (based on 60% Russell Developed Large Cap Index and 40% Barclays Aggregate Bond Index).
- 123.5% – The cumulative U.S. equity market recovery (including dividends) since the market bottomed in March 2009 (based on the Russell 3000 Index).
- 254% – The average cumulative ten-year recovery for the U.S. stock market following the worst market correction of each of the last 8 decades since the 1930’s (based on the Ibbotson U.S. Equity Index prior to 1979 and the Russell 3000 Index thereafter).
- 916 – The number of 10-year rolling windows of time since January 1926 and ending with December 2012. Zero is the number of times that a 60% U.S. equity / 40% bond index portfolio (based on the Ibbotson U.S. Equity Index prior to 1979 and the Russell 3000 Index thereafter; the Ibbotson U.S. Intermediate-Term Government Bond Index through 1975 and the Barclays Intermediate Government Bond Index thereafter) produced a negative return in those 916 rolling 10-year periods. That is the same amount that cash (based on Barclays 1-3 Year U.S. Treasury Index) returned during that same time period. However, on average, the 60/40 index portfolio returned 5% more per year than cash. 5% compounded annually over 10 years yields a 63% cumulative return greater than cash over a decade. That is the power of compounding, another useful math term.
These are some simple investment statistics that can be inserted into client discussions. Repeating these will not get Brad Pitt (or Angelina Jolie) to play you in the movies. Nevertheless, they may be helpful in addressing some of the concerns facing clients worried about their investments:
- Short-term results do not necessarily indicate success or failure of an investment
- Some recent returns are not as poor as they are often perceived to be, in fact they have been solid in many cases
- Client investment returns are driven in part by the starting price of the investment, not necessarily the sentiment of other market participants (think buying stocks in late 1999 when P/E ratios were high and everyone wanted to buy stocks vs. buying stocks in early 2009 when P/E ratios were low and no one wanted to buy stocks)
- The U.S. stock market recovery has been robust off the most recent bottom, but still appears to have the potential for additional appreciation
- Diversified portfolios tend to deliver positive outcomes over long time horizons
Moneyball is a 2011 biographical sports drama film directed by Bennett Miller from a screenplay by Steven Zaillian and Aaron Sorkin. The film is based on Michael Lewis’s 2003 book of the same name, an account of the Oakland Athletics baseball team’s 2002 season and their general manager Billy Beane’s attempts to assemble a competitive team.
The Big Bang Theory is an American sitcom created by Chuck Lorre and Bill Prady, both of whom serve as executive producers on the show, along with Steven Molaro. All three also serve as head writers. It premiered on CBS on September 24, 2007.
Revenge of the Nerds is a 1984 comedy film about social life on a college campus.
Russell Global Index: Measures the performance of the global equity market based on all investable equity securities. All securities in the Russell Global Index are classified according to size, region, country, and sector, as a result the Index can be segmented into thousands of distinct benchmarks.
The S&P 500 is a free-gloat capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock market exchanges: the New York Stock Exchange and the NASDAQ.
Russell 3000® Index: Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.
Ibbotson & Associate S&P 500 Composite with dividends reinvested. (S&P 500, 1957–Present; S&P 90, 1926–1956).
The Russell Developed Large Cap Index offers investors access to the large-cap segment of the developed equity universe representing approximately 70% of the global equity market. This index includes the largest securities in the Russell Developed Index.
Barclays Aggregate Bond Index: An index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities, and mortgage-backed securities. (specifically: Barclays Government/Corporate Bond Index, the Asset-Backed Securities Index, and the Mortgage-Backed Securities Index).
The Ibbotson U.S. Intermediate-Term Government Bond Index is an unweighted index which measures the performance of five-year maturity U.S. Treasury Bonds. Each year a one-bond portfolio containing the shortest noncallable bond having a maturity of not less than five years is constructed. Bonds with impaired negotiability or special redemption privileges are omitted, as are partially or fully tax-exempt bonds starting in 1943. To measure holding period returns for the one-bond portfolio, the bond is priced (with accrued coupons) over the holding period and total returns are calculated.
Barclays Intermediate Government Bond Index: The Barclays Intermediate Government Bond Index is a sub-index of the Barclays Capital Government Bond Index covering issues with remaining maturities of between three and five years
Barclays 1-3 Year U.S. Treasury Index: An unmanaged index of public obligations of the U.S. Treasury with a remaining maturity of one to three years.
Indexes are unmanaged and cannot be invested in directly.
Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
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