Quiz!
Starting in 3/2/2009, Extended-Term Component enjoyed gains while there were great concerns about the world economies. If anyone were to sell this investment for 6 months, what would be the missed gain, and what would have been the impact on the 10 year performance?
- 12% gain in 6 months = 1.1% lost per year over 10 years.
- 26% gain in 6 months = 2.3% lost per year over 10 years.
- 47% gain in 6 months = 3.9% lost per year over 10 years.
- 76% gain in 6 months = 5.8% lost per year over 10 years.
- 102% gain in 6 months = 7.3% lost per year over 10 years.
Don’t Worry, Climb a Wall of Worry
When stock prices go up in spite of many concerns, it is said that the stocks are climbing a wall of worry. How is it possible that stocks go up while there are many concerns? This is the result of stocks reacting to two things: (1) changes and not an absolute situation; (2) expectations and not just the current situation. A few examples:
– There was an expectation for a very low price of oil, but the price spiked by 35% in just over a month, given an expectation for limited supply and increased demand.
– There was an expectation for 4 interest rate increases in the US this year, and this expectation went down to 2.
– There were a number of stimulus actions in Europe and China.
The improved expectations did not eliminate the worries, but they presented a more positive outlook, leading to big gains in stocks.
While a climb on a wall of worry can happen at any level of valuations, it is more typical when valuations are very low, and that is when you need to pay special attention. You can expect surges from low valuations to involve a climb on a wall of worry, since deep bottoms occur due to a long list of concerns, and these concerns are typically removed gradually over months or years. Avoiding an investment when valuations are low is risky, and can result in a negative impact that can be felt for a decade or longer. A good example is the 6 months starting at 3/2/2009. During that time, Extended-Term Component gained 102%. Missing such a period would lower the 10-year performance by 7.3% per year.
Quiz Answer:
Starting in 3/2/2009, Extended-Term Component enjoyed gains while there were great concerns about the world economies. If anyone were to sell this investment for 6 months, what would be the missed gain, and what would have been the impact on the 10 year performance?
- 12% gain in 6 months = 1.1% lost per year over 10 years.
- 26% gain in 6 months = 2.3% lost per year over 10 years.
- 47% gain in 6 months = 3.9% lost per year over 10 years.
- 76% gain in 6 months = 5.8% lost per year over 10 years.
- 102% gain in 6 months = 7.3% lost per year over 10 years. [The Correct Answer]