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When we started Young Research’s Retirement Compounders (RCs) in 2003, the goal was to look for a compelling competitive advantage to make the RCs a big winner, especially during bad times. Our strategy was to accept underperformance during speculative market runs, regardless of the duration, with the expected tradeoff of better performance during bad markets. Patience is always required with such a strategy.
The idea was never to beat the market over time or on a consistent basis. Rather, we fully expected the low risk RCs (both price risk and business risk) to trail the major market averages. We know this is blasphemy in the investment management business where the raison d’etre of many (especially mutual fund managers) is to outperform the market. But few in the industry acknowledge the ugly reality that the average equity investor vastly underperforms the market. This is true even for investors who own market beating mutual funds.
Work by Dalbar shows that over the last 20 years, the average equity investor has trailed the S&P 500 by an astonishing 4.32% per year. High volatility is to blame here. Investors tend to sell in a panic near the lows and add to their stock positions near a market top. Take 2011 for example, a year of heightened volatility in the stock market. In the first four months of 2011, the S&P 500 rose 8% only to drop 20% over the next five months. Then in the final three months of the 2011, the market gained 15%. The net result was a 2.1% gain for the S&P 500. How did the average equity investor do in 2011? He lost 5.7%.
By crafting lower risk portfolios, the goal of the RCs is to help investors avoid the emotionally charged investment decisions that often lead to abysmal long-term results. With eight full years of returns now in the books, how have the RCs performed relative to our expectations? They’ve exceeded expectations both in terms of raw returns and more importantly, in terms of risk-adjusted returns.
In every full year of its existence the RCs program has earned more than the S&P 500. To help you put that into perspective we ran some numbers on the Morningstar mutual fund database. Morningstar’s database of diversified equity funds includes 4,500 funds with returns from 2004 forward. Only two funds in each of the last eight years have earned more than the S&P 500. (That’s two out of 4,500.) Young Research’s Retirement Compounders, although not a fund, has achieved the same record.
Most importantly those returns have been achieved with excellent risk-adjusted returns. For the entire period, our risk has been about 90% of the risk of the stock market as a whole. And over the last three years, the Retirement Compounders’ risk has been about 75% of the risk of the entire market.
We of course can’t promise that the RCs will continue to outperform the market, but we can promise that we will continue to manage the RCs with the same dividend-focused, low-risk strategy we have pursued since the program’s inception.
Jeremy Jones, CFA
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