Don’t Like Volatility? Take a Longer-Term View


“Financial advisers need to show their clients what the distributions of stock returns are over time.” This paraphrased recommendation was given by University of Chicago professor Eugene Fama at a CFA Chicago Society event held last week. The comment was in reference to what happens to returns the longer an investor remains allocated to stocks.

Fama was specifically referencing the historical distribution of returns—a bell curve. For those of you less familiar with statistics, a bell curve plots out a group of data. Think of it as a valley followed by a hill followed another valley. To the extent data points are within a normal range, they are bunched up, forming a hill (the “bell”). The valleys are the outlying low (“left tail”) and high (“right tail”) values.

We’re working on annotated bell curves of equity returns to show graphically how their variances change over time. While the charts are not ready for prime time, the takeaway from them can be explained. In simple, summarized terms: The longer an exposure to stocks has been maintained, the more likely positive outcomes occurred and the closer the outlying returns were to the typical range. Put another way, if you look at your portfolio with the frequency Rip Van Winkle would, you’ll more likely notice both gains and less volatility. Continue Reading »

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(Return data as May 31, 2017)

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Highlights from this month’s AAII Journal

AAII Sentiment Survey

Pessimism declined to a four-month low, but continues to remain close to its historical average. More about this week’s results.

This week’s results:
  • Bullish: 32.7%, up 0.4 points
  • Neutral: 38.4%, up 0.2 points
  • Bearish: 28.9%, down 0.6 points
Historical averages:
  • Bullish: 38.5%
  • Neutral: 31.0%
  • Bearish: 30.5%

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The Week Ahead

Twelve S&P 500 companies are scheduled to report, including Dow component Nike (NKE) on Thursday.

The week’s first economic reports will be May durable goods orders, which will be released on Monday. Tuesday will feature the April S&P/Case-Shiller home price index and the Conference Board’s June consumer confidence survey. May international trade in goods and May pending home sales will be released on Wednesday. Thursday will feature the final revisions to first-quarter GDP. May personal income and spending, the June Chicago purchasing managers’ index and the University of Michigan’s final June consumer sentiment survey will be released on Friday.

Four Federal Reserve officials will make public appearances: San Francisco president John Williams on Monday, Tuesday and Wednesday; Philadelphia president Patrick Harker and Minneapolis president Neel Kashkari on Tuesday; and St. Louis president James Bullard on Thursday.

The Treasury Department will auction $26 billion of two-year notes on Monday, $34 billion of five-year notes on Tuesday and $13 billion of two-year floating rate notes and $28 billion of seven-year notes on Wednesday.

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