When we developed Young Research’s Retirement Compounders (RCs), our aim was to find a compelling competitive advantage to make the RCs a big winner, especially during bad times. Our overriding goal was to help investors like you achieve investment success with comfort and confidence. Our strategy was to accept underperformance during speculative market runs (like we’ve seen in recent years), with the expected tradeoff of better performance during down markets.
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.
Why would we design a program to underperform?
The ugly reality of investing that nobody likes to talk about is that the average equity investor vastly underperforms the market and the funds he invests in. This is true even for investors who own market beating mutual funds.
Dalbar is the authority here. Over the last 20 years, Dalbar’s data shows that the average equity investor earned 5% versus the S&P 500’s 9.2%. That is little more than half the return. And Dalbar isn’t the only firm that has found evidence of poor investor performance. Morningstar reports that over the last 15 years, the Vanguard 500 Index Fund has earned a compounded annual return of 4.25%, while investors in that fund have earned an average of 1.83%.
Volatility and Emotionalism
High volatility and emotionalism are to blame. When stock market volatility rises, many investors panic and sell near the lows only to add to their stock positions once again in the dying days of a bull market.
Thanks to zero percent interest rates and a perpetual bond buying program by the Fed, we haven’t seen much volatility in recent years, but we saw a lot of it in 2011.
In the first four months of 2011, the S&P 500 rose by 8% only to crater 20% over the ensuing five months. Then the market vaulted ahead by 15% in the final three months of the 2011. The net result was a 2.1% gain for the index.
How did the average equity investor do in 2011? He lost 5.7%.
Retirement Compounders Help You Stay the Course
Young Research’s low-risk RCs help investors avoid the emotionally charged investment decisions that can sabotage returns. Investing in high-quality businesses with long records of regular dividend payments offers the comfort and confidence necessary to stay the course when financial and economic stress arise. The end result is often greater long-term returns for investors.
How have the RCs performed relative to our expectations?
During the last major bear market, the RCs held up better than the broader market just as they were designed to do. And since one of the most speculative liquidity fueled rallies in history began in the spring of 2009, the RCs have delivered 90% of the market’s return with only about 85% of the risk.
In the time since inception, which includes two speculative bull-runs and a nasty bear market, the RCs’ performance has far exceeded our expectations. The chart below shows that since inception, the RCs have outperformed the Dow and the S&P by a wide margin.
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.
You can follow along with Young Research’s Retirement Compounders by subscribing to Young Research’s Global Investment Strategy and Richard C. Young’s Intelligence Report. If you are interested in a managed portfolio, please click here.
Jeremy Jones, CFA
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