You know how this story ends, but the truth is both approaches can work over the long-run, so long as you have the patience and tenacity to stay the course.
In the chart below, we compare the 30-year performance of Young Research’s Cyclical and Defensive Indices. Think of these as proxies for the tortoise and hare approach to investing.
The Young Research Cyclical Portfolio is a modified market capitalization weighted index of the technology, industrial, energy, materials, financial and consumer discretionary sectors. These are the sectors that tend to fluctuate most with the business cycle. The defensive portfolio is a modified cap-weighted index of consumer staples, telecom, utilities and healthcare. These sectors are less sensitive to the business cycle.
The cyclical index has bigger ups and downs. It tends to rise faster during economic expansions, but also crashes much more in recessions and bear markets.
The defensive index provides slower and steadier growth. Returns can lag during expansions, but the defensive index falls much less during bear markets.
If you are in or nearing retirement, you will likely find that a defensive strategy provides a much more enjoyable investing experience. You lose less in bear markets when you are more prone to panic, and you earn more of your return in the form of a steady stream of dividends.
The only real snag some investors face with the tortoise approach to investing, is it is often behind for much of the race. This shouldn’t be a problem as long as you are focused on your own goals and objectives. But if you allow yourself to fall prey to the financial industry’s near obsession with relative performance, all bets are off.
For decades we have advised investors in or nearing retirement to pursue a more defensive investment strategy. We continue that research today exclusively for Richard C. Young & Co., Ltd.
The tortoise heard his taunting jeer,
But still resolved to persevere,
Still drawed along, as who should say,
“I’ll win, like Fabius, by delay”;
On to the goal securely crept,
While Puss unknowing soundly slept.
The bets were won, the hare awake,
When thus the victor tortoise spake:
“Puss, though I own thy quicker parts,
Things are not always done by starts,
You may deride my awkward pace,
But slow and steady wins the race.”
Jeremy Jones, CFA
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