Investment Performance: the 30 percent loss yardstick

Supposed I had $100,000 in my retirement account and my investment strategy returned 10 per cent per annum and compounded once a year like clock work for ten years. According to the SEC compound interest calculator, my account would be valued at $259,374.25 at the end.

The true cost of a 30% loss

Suppose at the end of Year 5, when my account was valued at $161,051.00, the investment strategy took a loss of 30%, leaving me with $112,735.70. What rate of return would I need to obtain over five years to get back to $259,374.25?

  • Five more years at 10% gets us to $181,561.97
  • Five more years at 15% gets us to $226,751.76

It would take five years at 18.133% return, compounded annually to get to $259,368.74.
If you look around and take note of your friends and neighbours, you know that this sort of happy ending almost never happens. This is why — when you evaluate an investment strategy — RISK IS MORE IMPORTANT THAN RETURN.
The bigger the drop, even if it is a single one, the more likely you will NEVER reach your goal. Since a 30 percent loss was COMMON in 2008, you must RUN AWAY from ANY investment strategy that shows this sort of “performance” in 2008 or any other one-year period. Anyone who doesn’t, is stupid.

“Where can I see the past performance results?”

The guy who asked that question provided two strategies as examples of “10 year annual returns that ranges from 8% to 10%.”
Gone-Fishin-Portfolio-returns-tableThe second one was the Gone Fishin’ Portfolio. If the words “The Oxford Club” did not set off the alarms, then the 2008 performance should.
A loss of 31.7% in 2008 completely eliminates this from consideration. I don’t care if it lost less than the S&P 500 index. Beating the market by losing less does not change the math, and the math dictates that this strategy is untouchable.
The first strategy he provided was the Six Core Asset ETFs by MyPlanIQ.
How did that strategy perform in 2008? The loss was 27.6% from a high on May 19 at $18,461.25 to the December 31 value of $13,364.40. We also know this INCLUDED dividends.
NOTE: The data was provided by the VENDORS of these two strategies. We have no idea if what they printed is true, or if the calculations are correct. Don’t laugh. At this very moment, the world as we know it is in austerity mode based on wrong data!

It’s all in the compounding

I know it’s boring, but compounding is everything. Consistency is king. The roller coaster is thrilling for you at the amusement park, but a wild ride is not for appropriate for your money.
One last thing. The late Ian Notley used to feature a graphic on every one of his newsletters, arranged in a circle from the words below (although I am not sure the first sentence is exactly as he had it):
When prices are high,
they love to buy.
When it’s low,
they let ’em go.

Before you go, there is one more cautionary tale. The failings of humans acting in the face of uncertainty has one last, sad chapter: people always puke at the bottom, and therefore, do not get the benefit of the rebound. The math, in this case, is even worse, isn’t it?
I won’t go into it now, but even more ironic, is the fact the mass puking MAKES the bottom, for there is no one left to sell. Someone who knows all about this phenomenon is the manager of the 2009 Best Stock Fund of the Decade: CGM Focus, Ken Heebner:

In the next installment, we will show you how to evaluate performance of funds and strategies where we can obtain reliable, public data.