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Monday, November 9, 2015

Making Time (Even More of) an Investor's Best Friend

Ben Carlson of A Wealth of Common Sense blog (and author of a great book by the same name), had a recent post Playing the Probabilities outlining that time has been an investor's best friend (for those investors that have had in some cases quite a bit of time), pointing to the following table.


He also shared some pretty amazing stats, including:
The worst total return over a 20 year period was 54%. But the worst 30 year total return was 854%.
While I certainly agree with everything he outlined, he did ask the following question.
Has anyone figured out a better way of compounding your money in stocks beyond increasing your holding period? Not many.

Challenge accepted!

Simple rules (for more... see Meb Faber's record downloaded white paper):
  • If the S&P composite TR is > 10 month moving average, stay in stocks
  • If the S&P composite TR is < 10 month moving average, move to bonds (in this case 10 year treasuries)
The equity curve.


And the updated table with some additional bells and whistles (note there are some very slight differences with the returns Ben produced, but the message is identical).


While there is no free lunch (in this case, an investor gives up some upside over shorter time frames), using these basic momentum rules resulted in no negative returns over any ten year period and actually increased the long-term returns over this 1926-2015 time frame, making time an even better friend for an investor.