By Bill Kelly, CAIA Association CEO
Benjamin Graham’s mythical Mr. Market remains alive and well. He continues to always be available, but is often irrational, emotional, and inefficient. These same characteristics embody why he could be looked upon as the de-facto patron saint for the month of October where the lore of drawdowns is legendary, and why not? Black Monday, the largest single drawdown in the history of the S&P 500 happened in October of 1987, and this infamous month holds the record for no less than five of the top 10 worst performing days for this index, but let’s take a breath before we hit the bid.
Perspective can only be achieved over the long term and an analysis that spans 90 years certainly meets that basic litmus test. Kim Iskyan used this expanse to examine the true impact of the October effect and found that on average, this dreaded month is, well, exceedingly average. Of the approximately 1,100 months in his sample, 62% were on the positive side of the ledger which comported with the exact same experience for the months of January, June, November, and the oft-maligned October. The average annual return for any single month was +80 BPs, or a bit better than October at +50 BPs, but (on average) the worst performing months are September, May and February, which failed to compound at all.
Perhaps it is time to silence the inner voices of Mr. Market and now Ms. Month because they have proven to be anything less than helpful over the long term. A somewhat recent 30-year analysis by DALBAR paints an even gloomier picture of our ill-timed inclinations. Their research concludes that the average equity mutual fund holder has timed his/her way to a compounded return that clocks in at a whopping 742 BPs per annum shortfall to the S&P 500, where $100k trebled at the end of three decades, vs. a “could-have-been” $2.4M by just sheltering in place.
These facts are, at times, hard to reconcile with the regulators and policy makers who are ostensibly in the business to protect the investor, and thereby getting the Ms. October within us to think (and act!) more for the long term. Just last month we asked a similar question in Have You Ever Wondered Why? in response to the SEC’s expansion of the definition of an accredited investor; now it is the US Department of Labor and an apparent gutting of the fiduciary’s responsibility for proxy voting that has us scratching our heads. DOL’s proposed regulation on this topic deals with the continuation of a thesis of a short(er)-term analysis that must be centered around a pecuniary interest and an economic bottom line for the underlying plan, comprised of the same market-timing souls described above. The long-term risks, especially those associated with the majority of ESG proposals, are measurable and real, yet the fiduciary is being boxed into a position where the clearest direction will likely be to refrain from voting at all.
The CAIA Association is a professional body for alternative investments and we believe in the power and purpose of diversification over the long term, and our comment letter to the DOL on this proposal respectfully reflects those sentiments. As we enter another first full week in yet another October, let’s remember that Mr. Market is simply a figment of our collective imaginations and it is we who own the proxy to better retirement outcomes for ourselves, and the many investors for whom we have the pleasure to serve.
Seek education, diversification of both your portfolio and people, and know your risk tolerance. Investing is for the long term.