Value over Growth and Tech
The essence of investment management is the management of risks, not the management of returns.
Compound returns are what determine client outcomes. Maximizing compounded returns is a singular objective that arguably encompasses all other investment objectives. It’s the one thing that all investors are trying to solve for. How can we generate sufficient compounded returns to maintain my lifestyle or better yet, improve it for those that come behind me? Given this importance, let’s think a little harder on the table below. Keep in mind, we recognize that 18 months is not ‘long term’. But the difference between 2022 and 2023 is so stark, and a live reminder of the concept.
The Nasdaq has been the shining star of the recent past, it’s up nearly 40% year-to-date in 2023. Its annualized return over the past 18 months is still a negative -4.92%.
Compare that to the Large Value Category (as measured by the S&P 500 Value Index). It’s up only 12.13% for 2023, but its annualized compounded return over the same 18 months is a positive 3.13%.
The numbers for the Large Value Category are better because of the downside, not the upside. Sure, 12.13% is a solid 6-month return, but it’s a far cry from nearly 40%! The separation occurred because a minus 5% generates less friction towards the goal of compounding than a minus 32%. This is not a recommendation of different stock categories, it’s simply a real-world example that large losses eat into compounding. Compounded returns are the name of the game, and the means to play the game is your capital. Protect it.
The Good News, The Basics of Time and Return
Investors seem to underestimate their time horizon and overestimate the return required to compound (grow) their wealth at a rate that sustains their current lifestyle…if not improve It. This is good news. For example: the 60-year-old that wants to retire in 2 years and thinks that is her horizon. It’s not, it’s much longer. Compounding capital at 7% a year does not sound all that exciting. 7% combined with time is a compelling combination.
The table illustrates the growth of both $100k and $1mil over different time periods as it compounds at 7% with no additional savings:
We work with the lifeblood of financial services. With advisors serving families that have worked hard to accumulate assets and need those assets to work for them. Most investment objectives are based on life goals, not benchmarks. Those objectives do not require massive rates of compounded return.
Reach out today for a personalized consultation from a boutique firm that encompasses your individualized plans, risks, goals and objectives.
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