Investors may be worried about current returns, but as Castle Point Portfolio Manager, Stephen Bennie’s research demonstrates, even if you knowingly held the best possible portfolio, it’s impossible to avoid market drawdowns.
Bennie drew on research conducted by US firm Alpha Architect, which tracked the return of the S&P500 over a 90-year period and measured it against a concentrated portfolio of the 50 best-performing stocks, (rebalanced every five years to include the known best-performing stocks over the following five-year period) during the same 90-year timeframe - referring to this perfect foresight strategy as ‘God’s Portfolio’.
Bennie’s research discovered that simply holding the S&P500 for 90 years would have delivered a very satisfying return; compounding $1 into $50,000 (an average 12.77%pa). But, as expected, “God” outperformed the index, turning $1 into an eye-watering $12,000,000,000 (that’s $12billion!);
a phenomenal 29%pa.
Yet, it too experienced some rough patches along the way. In fact, God’s stocks at times suffered falls almost on par with the index (values dropping about 76%, versus the almost 85% collapse of the S&P500 in 1929), and it also underperformed the benchmark in several one-year rolling periods, over the 90 years in question.
This theoretical (maybe theological) research highlights a truism for many share investors who are facing the toughest challenge to their faith in markets in many years… you just can’t win ‘em all!
“It’s been a testing start to 2022 for equity investors - volatility has spiked on macro and geopolitical news. Drawdowns like this are an intrinsic part of share markets - even the almighty ‘God’s Portfolio’ gets hit. But staying invested and thinking long-term works: that’s how you use the share market to create wealth.”
Source: Heathcote Investment Partners and Castle Point Portfolio Managers
The views and opinions expressed in this article are intended to be of a general nature and do not constitute personalised advice for an individual client.