How Consistent are your Investments?

One interesting thing we’ve seen out of the bout of recent volatility has been the quick defense of the stock market. Where one might expect cries of panic or fear, or at least caution, we’re reading articles and hearing talks which say something along the lines of:  this is just normal gyrations, just noise to be ignored, just part of the game (check out our recent football analogy of investment styles). The long term investor, they say, barely knows it happened when looking back at their investment performance over the 1,3 or 5 year period, where the long-term-edness (we made that up) of stock market investing wins out. Yahoo Finance had this to say on the day of the Dow’s big drop:

It’s also worth putting today’s selloff in context. The market is still only at a 10-month low, meaning investments are still worth more than they were as recently as a year ago — and you’re likely way ahead if you’ve been in the market for longer than

that. Including its recent losses, the S&P 500 is still up more than 75 percent over the last five years, and it’s nearly tripled from its lows in early 2009.

“In times like this, it’s important to remember your investments are designed to carry you through decades, not days,” Lane Jones, chief investment officer with Evensky &Katz wrote in a note to clients today. “It’s important to stay focused on the long-term.”

The contrarian in us says the worst of the losses in the stock market probably aren’t over if the general response is a sort of – “it’s nothing” approach; but the analytical side wanted to see how the stock market’s long-term-edness lines up against other asset classes. Maybe stock investors are on to something here, and stocks really do look much less volatile and less risky on a longer time frame? Maybe the key to stock investing is just ignoring the interim, and finding everything all hunky dory after a few years. Which led us to wonder just how other asset classes do when looking through the same lens. Are investments in stock markets or ETFs like $SPY $DIA $QQQ or $IWM really any more or less consistent than other investments, specifically those in the managed futures realm we deal with?

To see just how smooth returns look over longer time frames, we took a look at the rolling returns of both managed futures (via the Newedge CTA Index) and the stock market (via the S&P 500) over 12, 36, and 60 month windows of time from January 2000 through December 2014; then measured the percentage of time each had lost money. If the theory is, ignore that short term moves lower because over the long term the market comes back, we would expect to see a very small percent of 3 and 5 month windows in negative territory for the stock market… How did it actually look:

(Disclaimer: Past performance is not necessarily indicative of future results)

Whoa… turns out stocks are actually negative on a 5year lookback about a fifth of the time, and in the red on a three year lookback about a third of the time. Now, we’ll concede that they look very good on a three year basis in terms of barely ever losing more than -5% over a three year period, but it turns out managed futures can hold a candle to that flame all day long. You see managed futures have demolished stocks when considering them on the downside; with no losses more than -10% in any of the 12, 36, or 60 month periods.

Put another way – if you could have mustered allocations to the components of the Newedge CTA Index at any point in the past fifteen years… you would never see losses more than -10% for ANY one, three, or five year stretch (and just a handful of periods below -5%). Stocks can’t touch those statistics with a ten foot pole. For more on Managed Futures overall performance profile, check out our Performance Profile whitepaper.  Impressive? Sure. But realistically, you can’t invest in a CTA index. You invest in actual programs, some which have performed better than the benchmark indices, some which have done worse. For that, we suggest checking out our recently updated Semi-Annual Managed Futures Rankings.

So keep telling investors not to panic when stocks go down. But realize they’re complacent with table wine (instead of the premium) in this category – it’s a function of time more than of the investment class; with most asset classes sharing the ‘time heals all’ profile.