It has now been 19 years since we started Young Research’s Retirement Compounders Program. Our overriding goal in developing the RCs was to help investors like you achieve investment success with comfort and confidence.
Compounding is the key to long-term investment success. And to reap the profound rewards of compounding, you need time—the more time, the better.
Consider the hypothetical example of an investor who earns 8% on a $100,000 investment. After ten years of compounding at 8%, $100,000 becomes $216,000. After 20 years, $100,000 becomes $466,000. That’s more than four times the initial investment. After 30 years of compounding at 8%, a $100,000 investment becomes over $1,000,000! That’s more than 10X the initial investment.
A Lower-Risk Approach
For the RCs to help investors achieve long-term investment success, the program had to have a risk profile low enough to keep them comfortable and invested even during market downturns. Selling during a bear market and buying after the coast looks clear is a strategy that is certain to sabotage the benefits of compounding.
Imagine if you sold at the market low in March of 2020 when a COVID depression looked imminent and waited to reinvest until the end of November 2020. Pfizer had announced the vaccine that month, so things were finally looking up. If you pursued that strategy assuming a start date of January 1st, 2020, you would still be down about 15% today, despite the stock market being up almost 40% since then.
Such a scenario may sound hypothetical to you, but it isn’t. Dalbar, a market research firm, does studies on the performance of individual investors versus the market. The studies regularly show individuals underperforming the market by 3-4% annually. Poorly timed buy and sell decisions are to blame.
How does the RCs program help investors stay the course during market downturns?
For starters, the RCs program invests only in companies that pay dividends. The RCs selection process also favors high-quality businesses with long records of making consistent dividend payments and preferably long records of making regular dividend increases. Companies that pay dividends and increase their dividends over time are often more stable businesses than non-payers, and they tend to fall less in down markets than non-payers. Our lower-risk approach also favors companies with strong balance sheets and those with high barriers to entry. So even if share prices are down, investors can be confident that first, bankruptcy is not on the table, and second, the business will recover when the economy and markets recover.
How has the RCs program lived up to our initial design?
It has far exceeded our expectations. Remember, we are taking a lower risk approach than the broader market. On the back of one of the biggest growth-stock bubbles in history, the S&P 500 recently pulled ahead of the RCs since inception, but the S&P is a much different benchmark than it was in decades past, and it only tracks U.S. stocks. The RCs is a global equity strategy. The RCs remain far ahead of the most commonly used global equity benchmark, the MSCI All-Country World, Net Index.
Looking only at the headline returns of broader market indices such as the S&P and MSCI All Country doesn’t really do the RCs program justice. In some cases, the RCs program takes much less risk than the benchmark indices.
You may say, “that is fine and well,” but instead of taking, say, 20% less risk by investing in the RCs, you will just invest 80% of your money in the market and leave the other 20% in T-bills, which should give you the same risk profile as the RCs.
That would be a more useful comparison. We would still contend you aren’t completely accounting for the lower risk because we favor companies with less business risk, which is more difficult to quantify.
Nevertheless, we can see how equalizing the price risk profile of indices like the S&P 500 compares to the RCs.
A Risk-adjusted Comparison
The chart below takes this approach. It compares the growth of $100,000 in Young Research’s Retirement Compounders to the risk-adjusted returns of the MSCI All-Country World Index, the S&P 500, and the Russell 1,000 Value Index. The methodology of the risk-adjusted benchmark is explained on the chart.
On a risk-adjusted basis, the RCs win out. The S&P 500 has made up ground over the last five years as more speculative shares have performed well, but we’ll see how that looks on the other side of the cycle. The broader and more appropriate MSCI All-Country World Index is the lowest performing benchmark on a risk-adjusted basis. In market downturns, the RCs have typically fallen 30% less than the world index, i.e., the RCs tend to fall 7% when the MSCI All-Country World index falls 10%. We included the Russell Value Index here to contrast it with the S&P 500, which has become dominated by non-dividend paying growth shares. Note how much the S&P 500 has pulled away from the Value Index over the last five years. There are many more RC candidates in the Russell 1000 Value index than in the S&P 500.
Click chart to enlarge.
We, of course, can’t promise that Young Research’s Retirement Compounders® program will continue to outpace any benchmark on a risk adjusted basis. We can promise that we will continue to manage Young Research’s RCs program with the same dividend-focused, low-risk strategy we have pursued since the program’s inception.
