The sure thing

  By Guest Blogger Doug Rowat

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When I was 27 I bored easily. So, when I was advised to invest my money for the long term and to focus on risk-management, it came across as a painfully dull strategy. Where were my get-rich-quick ideas? It was the dot-com boom—I wanted flavour-of-the-minute Internet stocks. My ‘NSync frosted tips and Nokia 3310 cellphone didn’t come cheap.

So, armed with my six whole months of investment industry experience, I went out there and did just that—loaded up on unprofitable and outrageously expensive Internet companies with, of course, virtually zero trading history. There was no consideration given as to whether or not my enormously risky investments might fail spectacularly. How could that possibly happen?

But, of course, most did.

Internet-software company 7/24 Solutions, for instance, which I bought because one of my old firm’s technology analysts could barely contain his joy every time he mentioned the company’s name, tanked almost instantly. As the cratering continued, the head institutional trader caustically joked at morning meetings that the analyst’s target price, which remained idiotically high, should simply be lowered to $7.24. As it happened, our trader was pretty close to the mark. I think the company eventually got bought out for a few bucks a share, but its exact fate is lost to the scrap heap of tech-wreck history. Here’s the ride I took (and yes, the stock once traded as high as $2,700):

Downhill skiing: My wild rise with 7/24 Solutions

Source: Bloomberg

Aside from sounding boring, one of the problems with invest-for-the-long-term guidance is that advisors rarely present in detail the historical returns that the major world equity and bond markets have been able to achieve. In other words, investors fail to get a clear picture of what their potential long-term returns might look like if they were to simply adopt a diversified, broad-market approach. If the advice had had some cold, hard performance data behind it, I might have listened more.

Interestingly, the concept of examining overall-market returns is a relatively new one and when this data was first presented it was revolutionary. Michael J. Mauboussin highlights as much in his book More Than You Know: Finding Financial Wisdom In Unconventional Places:

…the first comprehensive study of the performance of all stocks wasn’t published until 1964. In that paper, University of Chicago professors Lawrence Fisher and James Lorie documented that [US] stocks delivered about a 9 percent return from 1926 to 1960. Peter Bernstein notes that the article was a “bombshell” that “astonished” academics and practitioners alike. The description itself caused a stir in the finance and investing worlds.

Today, of course, we have a much clearer picture of long-term returns, but even still, for most investors, the exact numbers are vague. Have Canadian equities, for example, returned 9% long term? Or is it 8%? Perhaps 6%? (Answer: closer to 7%.)

So, below I provide the actual 30-year annualized total returns for each of the major world benchmarks. It’s basic information, but still a helpful starting place for long-term investors.

These returns, of course, can’t be guaranteed in the future, but they provide reasonable assumptions for future financial planning. Different markets outperform and underperform at different times, obviously, so it would also be helpful to have an advisor who actively tilts your portfolio towards the more favourable markets; but still, you could do worse than to simply equal-weight each and hold long-term. I’d bet that achieving similar returns in the future would get most investors to where they ultimately wanted to be financially.

Or you could try and hit the jackpot by finding the next Amazon.com. But, be honest with yourself, you’re more likely to end up with the next 7/24 Solutions.

Quotable scoundrel Wilson Mizner, who certainly knew a thing or two about failed investments, said it best: “Gambling: the sure way of getting nothing for something.”

I learned the hard way. Same with my frosted tips.

Long-term returns for key global benchmarks

Source: Bloomberg: returns to end-June 2019, *only 18-year history available

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.