As June winds down, investors are reminded of the harsh reality that markets are two-sided. I realize short-term memory dominates investors’ minds, so I think we all need to be reminded just how far this market has gone over the past eight years.
After 13 years of the S&P 500 going nowhere, the major market index finally pushed through the decade-plus trading range at the beginning of 2013. The S&P 500 (SPY) has almost doubled since the breakout.
But let’s not forget the collapse in 2008 and the five years the market spent climbing out of that enormous hole.
Just think if you were lucky enough to start investing during those first few years of our latest bull market. That leads me to a New York Times article I discussed several years ago by investment manager Ed Easterling of Crestmont Research.
“Market returns are much more volatile than most people realize, even over periods as long as 20 years.”
That’s what Easterling’s profound research revealed. His research may alarm you, because it directly contradicts what we hear from most Wall Street “experts.”
How to Outperform the Market
It also echoes what I’ve been saying for years: buying and holding a basket of stocks isn’t enough by itself. You must use alternative investments to outperform the market over the long term.
To prove this fact, Easterling produced one of the most interesting infographics I’ve seen about the benefits, or lack thereof, of long-term investing . . . a detailed chart of an investor’s average annual return dependent solely on when an investor first entered and exited the market. His calculation accounts for taxes and inflation – something you almost never hear about.
The illustration is based on the Standard and Poor’s 500-stock index for the U.S. and goes back to before the Great Depression.
Easterling was incited to create the chart after furiously debating with a client about whether investors should expect to achieve long-term average returns in the future.
Polls by three major research organizations – the University of Michigan’s Survey Research Center, as well as UBS and Gallup – all found that investors are strikingly bullish. Most individual investors predicted that the stock market would return about 10% a year over the next 10 to 20 years — or about 7% after inflation.
But research tells us historical averages can vary greatly depending upon when an investor is in the market.
For instance, the New York Times article notes that, “After accounting for dividends, inflation, taxes and fees, $10,000 invested at the end of 1961 would have shrunk to $6,600 by 1981. From the end of 1979 to 1999, $10,000 would have grown to $48,000.”
Easterling felt that choosing a single date was arbitrary, which is why he created a compelling infographic to visually present the data. His detailed chart shows annualized returns in the S&P 500 based on thousands of possible combinations of market entries and exits.
After looking at his chart, it’s clear that stocks have underperformed for long periods of time. In fact, wealth creation is directly tied to the time in which you were invested.
So, is Easterling’s chart the beginning of the end for the financial industry? Not by a long shot.
Yes, investors are at mercy of the market gods when it comes to long-term investing, but that doesn’t mean that we should avoid investing all together.
Options Strategies Make the Difference
There are many ways to combat the unpredictable fate of investment returns. My favorite way is through conservative options strategies like selling puts and covered calls.
You can boost the yields of the market’s safest, shareholder-friendly, blue-chip, dividend-paying stocks like Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT) and McDonald’s (NYSE: MCD) with these options strategies.
In fact, we’ve been doing just that in the High Yield Trader portfolio. So far, in just nine months we’ve managed to more than double the dividend in over a 70% of our positions. Moreover, since its inception, the portfolio has outperformed the S&P 500 through the use of two basic options strategies: selling puts and covered calls.
So, let’s not fall prey to Easterling’s findings on long-term investing. Yes, Mr. Market will ultimately control the fate of the returns of our holdings, but he left out the power of selling options to increase the returns of your overall portfolio.
I hope you won’t allow yourself the same fate.
If you would like to take a closer look at Easterling’s chart, click here.