The implicit presumption is that if various segments of various markets behave in cycles, than a "long term" investor would have been invested over many cycles. Then, oscillations average-out. So if SCV does outperform in aggregate, but does so in short intense bursts, followed by long lulls, then our long-term investor will have been invested over many cycles of such bursts and lulls. Over an investment lifetime, it no longer matters much, where in a cycle an investor happens to die (taking death as the final cessation of the investment-tally).Here is an example: folks say over the very long term that the returns of small cap value have beaten the indices, and so many folks tilt toward SCV to try and capture that outperformance. But, that outperformance is taken from the average returns over many years, and usually the outperformance is during only a small window of time within that multi decade timeframe, while most of the other years it underperformed the indices. So, if you aren’t willing to commit to holding long term, you will likely not capture that premium. But, if you never sell and capture those gains during that period of outperformance, don’t you also run the risk of holding it too long to a point where the average returns back down to below the indices, and you basically had no benefit?
Another example: If international and US equities trade long periods of time outperforming one another, but over very long time horizons they average about the same return, you would only have realized the benefit had you sold during the US or exUS outperformance periods to lock in those gains and solidify the outperformance. If you held too long you would again just be accepting the market average.
The problem occurs, when cycles are both long and intense. Suppose that SCV lags for 20 years, but then enormously outperforms for 5 years: a 25 year cycle. Consider three investors, A, B and C, who all tilt towards SCV, and all invest for 60 years. Investor A has a lifecycle, starting right at the beginning of an SCV cycle. That's 20 years of underperformance, 5 years of outperformance, 20 years of underperformance, 5 years of outperformance... now that's 50 years... followed by 10 more year of underperformance, and Investor A dies. Investor B, starts 10 years into the SCV cycle... that starts with 10 of underperformance, 5 years of outperformance, 20 years of underperformance, 5 years of outperformance; then 20 years of underperformance... at the end of which, Investor B dies. Finally, Investor C starts 15 years into the SCV cycle: 5 years under, 5 over, 20 under, 5 over, 20 under, 5 over, and then C dies.
In the above example, Investor C does very well with SCV. Investor A, doesn't to very well. And Investor B, does poorly. It's generational luck!
Statistics: Posted by unwitting_gulag — Sat Sep 21, 2024 3:37 am — Replies 4 — Views 466