S&P 500 Calendar Year Returns vs. Intra-Year Returns: Chart

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I have written many times over the years that “time in the market” is more important than “timing the market”. This is because equity markets tend to overdo on either directions. That is markets overshoot during bull markets to astronomical levels only to decline dramatically at some point to great depths. In both directions, investors euphoria and fear drive stock prices to above-normal levels.

The classic example of this scenario played out last year in the US markets. In March, 2020 equities crashed as the pandemic began causing panic among investors. During the course of the next few months the S&P 500 fell by 34%. Any investor that panicked and sold at the trough would have lost big as markets turned swiftly and ended the year with a positive return of 16%.

The following chart shows the calendar year returns and the intra-year maximum declines for the S&P 500 price index from 1980 to 2020:

 

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Source: Principles of Long-Term Investing Resilience, MFS

Even during the Global Financial Crisis (GFC) of 2008-09, S&P 500 collapsed by about 50% by the return for the year was a loss of 38%. In the following year, the index shot up by 23%.

Related ETFs:

  • SPDR S&P 500 ETF (SPY)

Disclosure: No positions

Pyramid Distribution of US Equity Total Returns From 1825 To 2020: Chart

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The distribution of US equity returns based on total returns from 1825 to 2020 is shown in the chart below. Many studies have proven that over the long-term equities tend to yield a positive return than a negative return. The chart below confirms that as well. The only time US stocks as represented by the S&P 500 (its predecessor index to be more precise) plunged by forty to fifty percent was in 1931 during the Great Depression. More recently during the Great Financial Crisis ((GFC) of 2008-2009 equities fell by thirty to forty percent. Overall up years are more than down years.

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Source: via Cannon Asset Managers Twitter

It should be noted however that nobody is going to own stocks for over 100 years. However holding for a few decades is definitely a smart move even account for any bear markets in between. This is because severe bear market declines are usually followed by sharp and dramatic increase in stock prices which eventually become the start of a bull market.

Related ETFs:

  • SPDR S&P 500 ETF (SPY)
  • S&P MidCap 400 SPDR ETF (MDY)
  • SPDR Consumer Discretionary Select Sector SPDR Fund (XLY)
  • SPDR Consumer Staples Select Sector SPDR Fund (XLP)
  • SPDR Energy Select Sector SPDR Fund (XLE)
  • SPDR Financials Select Sector SPDR Fund (XLF)
  • iShares Dow Jones Select Dividend ETF (DVY)
  • SPDR S&P Dividend ETF (SDY)
  • Vanguard Dividend Appreciation ETF (VIG)

Disclosure: No positions

How Does Gold Perform During Heightened Equity Market Weakness ?

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Gold is an important asset class to own in a well-diversified portfolio. Holding even a small percentage of one’s asset in gold can cushion a portfolio when markets volatile. As gold is generally considered as a safe heaven asset class, investors tend to rush into it when equities decline. Simply put, gold is a defensive asset. When equity markets go through risk-off periods gold is one of the few asset classes that tend to benefit. Though gold does not offer income in the form of say dividends like stocks it can offer stability and peace of mind when there is blood on the street.

Gold’s outperformance during periods of heightened equity market stress in the past 30 plus years is shown in the table below:

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Source: The case for gold: A special report for institutionally managed superannuation funds, The Perth Mint

During the great Global Financial Crisis(GFC) of 2008-09 stocks plunged an incredible 48%. Gold on the other hand rose dramatically with a gain of about 48%. Similarly during the two European sovereign debt crises gold earned a positive return while equities fell.

Below is an excerpt from the above report:

Historical outperformance when equities decline
There are many research papers highlighting the fact that gold has historically been amongst the best performing assets when equities suffer their most significant drawdowns.

Examples include an AQR paper titled Good Strategies for Tough Times. Published in 2015, it looked at the ten worst calendar quarters for global equities between 1972 and 2014, when equities on average fell by just over 19% in those quarters.

The paper found that gold was the highest performing single asset during those quarters, returning +4.2% on average, outperforming global fixed income (+3.9%), and a hedge fund composite (-5.9%).

Perth mint researched and found during the worst five year calendar years for US stock market between 1971 and 2000, gold performed much better as shown in the table below:

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Source: The case for gold: A special report for institutionally managed superannuation funds, The Perth Mint

Gold strongly outperformed US Treasuries as well during the five periods shown above. In each of the five calendar year return for stocks, gold delivered an astonishing gain of almost 35%.

This again proves the resilience and importance of owning gold.

Related ETFs:

  • SPDR Gold Trust ETF (GLD)
  • SPDR S&P 500 ETF (SPY)
  • iShares TIPS Bond ETF (TIP)

Disclosure: No positions

The Sources of Energy of G20 Countries: Chart

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Coal is still one of the major energy sources in many parts of the world especially in Asia. Countries such as China, India, Indonesia, etc. rely on coal for their energy needs more than other sources. South Africa, for example depends on coal for 71% of its energy requirements according to a recent article at CFR. The author Lindsay Maizland notes that coal accounts for 30 percent of global energy consumption. This is surprising since renewable energy sources such as wind, solar, etc. have gained so much traction in the past few years.

The following chart shows the energy sources of G20 countries in 2020:

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Source: COP26: Can the World Slash Coal Use by 2030?, CFR

China is the world’s largest producer and consumer of coal. India is the next biggest coal consumer.

France and Brazil lead among the countries that are most reliant on nuclear, hydroelectric and renewable for their energy requirements. France is highly reliant on nuclear energy than any other country in the world. Similarly hydro electric power plays a major role in the energy sources of Brazil. The country is a surplus producer of electricity from hydro power and exports it to neighboring countries.

Related stocks lists

On the Gap Between Investor Returns and Fund Returns

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Investors in funds such as mutual funds and ETFs tend to earn lower returns than the funds they own over a time period. Many studies in the past have proven this theory. The gap in return between investors and funds is due to a variety of factors such as timing the market, lack of patience, poor decisions on the part of investors, etc. It is not uncommon for investors to chase a hot fund for example based on past returns only to stampede out of it when the market turns volatile. A research study by MorningStar in August this year also shows that fund investors fared poorly in returns when compared to the total returns of the funds. The study found fund investors earned 1.7% less than the total return of funds over the 10-year period ending in December, 2020.

From the research study:

Our annual study of dollar-weighted returns (also known as investor returns) finds investors earned about 7.7% per year on the average dollar they invested in mutual funds and ETFs over the 10 years ended Dec. 31, 2020. This is about 1.7 percentage points less than the total returns their fund investments generated over the same period. This shortfall, or gap, stems from inopportunely timed purchases and sales of fund shares, which cost investors nearly one sixth the return they would have earned if they had simply bought and held.

That investor-return gap is more or less in line with the gaps we found for the four previous rolling 10-year periods. The persistent gap between the returns investors actually experience and reported total returns makes cash flow timing one of the most significant factors—along with investment costs and tax efficiency—that can influence an investor’s end results.

Our research imparts a few lessons on how investors can avoid these gaps and capture more of their fund investments’ total returns. Investors can improve their results by holding a small number of widely diversified funds, automating mundane tasks like rebalancing, avoiding narrower or highly volatile funds, and embracing techniques that put investing on autopilot, such as dollar-cost averaging.

The following chart shows the difference between investor returns and fund returns for various fund types:

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Source: Mind the Gap 2021 – A report on investor returns in the United States, MorningStar

The worst gap is for alternative funds and the next worst was for sector equity funds.

Some of the ways investors can generate a better return include:

  • Trying to time the market – that is getting out and in of funds at the wrong times
  • Avoiding high cost funds
  • Automatic reinvestment of fund distributions
  • Investing on a regular basis such as bi-weekly, monthly, etc.
  • Increasing contributions during market downturns, if possible.

Related ETFs:

  • SPDR S&P 500 ETF (SPY)
  • S&P MidCap 400 SPDR ETF (MDY)
  • SPDR Consumer Discretionary Select Sector SPDR Fund (XLY)
  • SPDR Consumer Staples Select Sector SPDR Fund (XLP)
  • SPDR Energy Select Sector SPDR Fund (XLE)
  • SPDR Financials Select Sector SPDR Fund (XLF)
  • iShares Dow Jones Select Dividend ETF (DVY)
  • SPDR S&P Dividend ETF (SDY)
  • Vanguard Dividend Appreciation ETF (VIG)

Disclosure: No Positions