Wednesday, March 20, 2019

From the Desk of David Burks: An Investor’s Two Biggest Allies: Time & Diversification

David Burks
Author position
Sr. Vice President | Equity Income Analyst

From the Desk of David Burks

Hilliard Lyons Senior Vice President and Equity Income Analyst David Burks has been with the firm since 1983. He has been nationally recognized for his stock recommendations eleven times: seven times by Thomson Reuters and four times by The Wall Street Journal. David has appeared regularly on CNBC over the years.

An Investor’s Two Biggest Allies: Time & Diversification

Historically stocks have been the single best performing asset class for generating positive long-term returns. Stocks have outperformed corporate bonds, treasury securities, gold, as well as inflation. However, with stocks comes inherent volatility and increased risk. We saw ample evidence of that in last year’s fourth quarter. In just a span of less than three months, the Dow Jones Industrial Average plummeted by nearly 19%. This reminds us that stocks can move either direction very quickly and unexpectedly. On any given day, there’s a 54% chance that stocks will rise and a 46% chance they’ll decline. In any given quarter, these numbers improve considerably to 69% positive and 31% negative.

Yet look what happens when you extend the timeframes further. In the table and chart below we list the returns for stocks over rolling 1, 3, 5, 10, 15, and 20 year time periods from 1928 through 2018. While in any 1-year period stocks rise 73% of the time, the longer the time period, the higher the chance of a positive result. For example, if you extend the time period out to 15 years, stocks have risen 99% of the time.

Yet while stocks historically have performed well over the long-term, shorter term results can be and often are disappointing due to any variety of reasons. One of the best ways to offset the short-term risk in stocks is through diversification with bonds or fixed income instruments. Bonds tend to provide greater stability along with interest income. In the example above we also include the results of what an investment portfolio comprised of 60% stocks and 40% bonds would do over the same timeframes. As one can see, adding a fixed income component improved the probability of a favorable outcome in each of the different time periods listed. In addition, positive outcomes are attained more quickly. With stocks, it takes a full 20 years to ensure a 100% positive result. With a diversified 60/40 portfolio, the timeframe to achieve a 100% favorable outcome is cut in half to ten years.

More Recent History

Let’s now look at the same data from a more recent period, 1980-2018. This period includes both several long major bull markets and the NASDAQ-driven 2000-2002 bear market along with the severe 2007-2009 bear market that accompanied the Great Recession. We see that positive outcomes were attained faster in both of the 1-year periods compared to the 1926-2018 timeframe. Interestingly, both stocks and the diversified 60/40 portfolio experienced an identical 82%-18% positive/negative outcome after a 1-year time frame.

However, results begin to diverge meaningfully after 1 year. In just 3 years a balanced portfolio generated positive outcomes 95% of the time. By contrast, it takes over a 10-year period for stocks to attain that level. Moreover, a diversified portfolio achieves a 100% positive outcome after just 5 years whereas an all-stock portfolio takes a 15-year period to reach a 100% positive outcome.


What can we learn or glean from these historical results? We believe this data reinforces two important concepts. First, the longer an investor’s time frame, the more likely it is positive results will be achieved. While it is extremely difficult to build wealth through stocks shorter-term, it can become quite attainable for patient long-term investors. Second, diversification through bonds (and/or other asset classes) can both reduce the risk of an overall portfolio and potentially provide positive investment returns more quickly than investing in stocks exclusively. This type of approach can allow investors to capture much of the market’s gains with considerably less risk. Likewise, it might also reduce the losses in periods when the market declines.

Of course, future returns may vary from past returns. And there’s no guarantee that either stocks alone or a balanced portfolio will generate positive future returns. Yet history tells us that time plus diversification rewards investors. We encourage investors to utilize both these principles to increase their chances of achieving improved investment performance.



Each client’s investment needs, risk tolerance, and goals are different. This newsletter is not meant to be advice for any specific investor. Nothing in it should be construed as an offer to sell, or a solicitation of an offer to buy, any securities. This should not be used as the sole basis for an investment decision. Any opinions or estimates are subject to change without notice. For information about how any of this information applies to your personal financial situation, please contact your Wealth Advisor.

Past performance is not a guarantee of future results.

Note: Rolling returns display returns in overlapping cycles on the first day of the year, going back as far as the data available. In this way, rolling returns show the frequency and magnitude of an investment’s good and bad performance periods. (Morningstar)

Although the information provided to you in this newsletter was obtained or compiled from sources that we believe are reliable, J.J.B. Hilliard, W.L. Lyons, LLC cannot, and does not, guarantee that the information or data is accurate, timely, valid, or complete.

All investing involves risk, including the possible loss of principal. You should carefully consider investment objectives, risks, charges, and expenses of any investment before investing. Diversification and asset allocation do not guarantee a profit or guarantee against a loss.

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market or economic developments. The bond market is also volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect can be more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks.