February 15, 2020

Worry is a Waste of Money

The Bottom Line: The coronavirus has economists and investors calculating worst-case scenarios. We too fall prey to this exercise and can quickly rattle off the dreary drawdowns.  Chinese growth accounts for 35% of global growth; a decline in Chinese growth from 6% to 3% will deduct 15% from global growth assumptions before calculating in secondary effects, turning a 3.3% pre-corona global growth rate into a 2.5% post-corona growth rate.  This could certainly happen, robbing companies of earnings growth and investors of potential returns.  But what happens when we gaze further downfield?  Historical probabilities strongly suggest that short term interruptions backfill (like natural disasters), and delays in demand lead to symmetrical growth and earnings spikes downrange.  At W&A, we are not thinking about what to sell should this environment deteriorate…we are thinking about what to buy!

 

The Full Story

 

The contrast between the market’s returns on Fridays and non-Fridays this year perfectly sums up the dueling perspectives on the coronavirus.  Year to date, the Dow Jones Industrial Average has lost a total of 5% on Fridays while gaining a total of 8% on all other days.  Remember, markets work tirelessly to calibrate and recalibrate reality with expectations.  Over the weekends, economic releases stop, earnings releases stop, and central bankers hit their hammocks.  Reality takes a break so to speak, leaving expectations variables like the coronavirus, uncontested.  Traders, unwilling to hold positions over periods of asymmetric risk (also known as weekends) flatten their books while buyers simultaneously defer.  More sellers than buyers create this natural downforce on fearful Fridays.  However, once the week begins, reality and rallies return!  Recent reality has mixed encouraging economic, earnings, monetary and fiscal releases with reductions in the coronavirus’s rate of growth. Many economists have attempted to size negative impacts should the virus leap the quarantines, with some projections downright apocalyptic.  Anxious times like these increase Google searches and shorten fields of view.  Investors who maintain the long view can find comfort in the predictability of returns.

 

 

 

On any one given trading day, the S&P 500 has an even probability of rising or falling.  What did the Fed say today? Who tweeted what? What day of the week is it? Expectations vacillate, markets gyrate and it’s a coin toss.  If you use daily action for cues on overall market direction, your investment program will surely fail.  In fact, if you stop watching the news altogether and make no trading decisions at all, you have a 74% chance of making money in any given year, an 88% chance of making money over 5 years, and a 100% chance of making money over 20 years.  Returns vary within these timeframes, but much more so in the near term:

 

 

 

 

Between 1950 and 2019, the dispersion between the highest and lowest annualized investment returns declines from 86% over the one-year timeframe to 11% over the 20-year timeframe.  The 10-year timeframe, which most analysts consider a “full cycle” timeframe, has produced annualized returns of 19% at best and -1% at worst for a high/low dispersion of 20%.  If I offered you a 10-year investment with a 93% probability of success and an annual rate of return somewhere between -1% and 19% annually, would you take it? (Say yes…) What if I told you that you could not trade in and out of this investment over the ten years, no matter what? (hmmm…you might not hit that offer…but you should!!)  Unfortunately, human desire for control, safety and predictability leads us to act irrationally at times.  When it competes with worry, logic often loses.  Each year, DALBAR releases a study of actual individual investment returns vs. market returns.  From this data we can calculate the cost of worry:

 

 

 

In the example above, $50,000 invested and forgotten within the S&P 500 index between 1993 and 2018 became $285,407.  On average, the more active and vigilant mutual fund investors turned $50,000 into $186,378 over the same time period.  In total, their worry cost them nearly 200% over 15 years.  These models are simplistic and don’t account for taxes, cash flows and life events, but the point is clear: not only is worry a waste of time… it’s also a waste of money!

 

Have a great weekend,

 

David S. Waddell 
CEO, Chief Investment Strategist 

David S. Waddell

Author: CEO Chief Investment Strategist

After graduating from the University of the South with a BA in Economics, David began his career with Charles Schwab & Co., Inc. in Phoenix, AZ. Having been recognized for his outstanding business development record, David was promoted to the San Francisco- based Institutional Strategic Accounts Team, which interfaced with the Big 5 accounting firms and Schwab’s largest customers. David left Schwab to continue his education at the graduate level in Boston. While earning his MBA degree with a concentration in finance and investments at the F.W. Olin School at Babson College, he was appointed by the college Trustees to manage a team of seven portfolio managers overseeing the student-managed portion of Babson’s endowment fund. David also founded the Babson Investment Management Association to assist undergraduate and graduate students with training and career path planning in the investment management field. As the firm’s Chief Investment Officer, David chairs the W&A investment committee and combines macro economic forecasting, macro market analysis and macro risk assessments to design portfolio strategies utilizing public market securities worldwide. A civic leader in Memphis, David currently acts as Chairman of Epicenter Memphis, and Co-Chair of the Memphis Chamber Chairman’s Circle while also serving as a board member for LaunchTN and the New Memphis Institute. David previously served as chairman for The Leadership Academy, the RISE Foundation, and the Economic Club of Memphis. He also chaired the capital campaign to build the “Live” stage at the Memphis Botanic Garden. David was a member of the 2004 Leadership Memphis class and has been recognized as one of Memphis’ “Top 40 under 40” by the Memphis Business Journal, and as a finalist for “Executive of the Year” in 2007. In addition to weekly columns in the Memphis Daily News and the Nashville Ledger, David has appeared in the Wall Street Journal, USA Today, Forbes, Business Week, Investment News, Institutional Investor News, The Tennessean and Memphis Business Journal. He has also made appearances on Fox Business News, Yahoo Finance, Bloomberg TV, CNBC, and CBS News and ABC News Channels. Read some of David's articles on his author page in Inside Memphis Business. David has two wonderful children, Easton and Saylor, an obedient Labradoodle named NASDAQ, and a devoted Goldendoodle named Ripley.

Author

David S. Waddell

CEO

Chief Investment Strategist

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