The past seven years have been a remarkable investment journey defined by shocking stock market depths, robust recovery and the end of a 30-year bull market in bonds.
Here’s a surprising reality about the past seven years: you could have taken three very different paths with your investments and ended up with very close to an identical outcome. Consider this example derived from a post on The Research Puzzle blog by Tom Brakke.
Investor A, a conservative, risk-averse investor only invests in long-term U.S. Treasury bonds. Investor A buys and holds the iShares 20+ year Treasury exchange-traded fund (TLT).
Investor B seeks a bit more return than Treasury bonds provide but doesn’t like stock market volatility. Investor B invests in the iShares iBoxx Investment Grade Corporate Bond ETF (LQD).
Investor C is a go-for-it investor who doesn’t mind volatility. Investor C owns only the SPDR S&P 500 ETF (SPY).
They each invest the same amount of money on the first trading day of 2007 and they reinvest all income and dividends paid out by their holdings. This re-investment puts the performance in the context of total return (price appreciation + income received).
Remarkably, through the end of 2013, the 7-year total return of these very different investments was nearly identical.
- If you had invested $10,000 at the beginning of 2007, TLT (long-term Treasuries) had a cumulative return of 49.93%, growing to $14,993.
- The investment-grade corporate bonds (LQD) gained 49.80% to reach $14,980.
- The S&P 500 Index of large U.S. stocks gained 51.05% to reach $15,105.
(This example used compounded annual returns for each investment).
The Treasury bonds were beaten up in 2009 (-21.80%) and 2013 (-13.37%).
The S&P 500 dug a big hole with a -36.81% return in 2008 but rallied to new highs.
And the corporate bonds look relatively tame in comparison, growing steadily before a 2% decline in 2013.
It’s an odd coincidence that these three investments reached the same destination over seven years. While the outlook for each of these asset classes is much different now than it was in 2007, long-term returns have a way of ironing out the ups and downs along the way. The long-term view also helps clarify the benefits of owning a diverse collection of investments that offset each other’s ups and downs to eliminate some of the whipsaw experience as markets alternate peaks and valleys.
By Gary Brooks, CFP® — Brooks, Hughes & Jones Wealth Advisors — Tacoma, WA