What Investors Could Learn From Rip Van Winkle

Why your portfolio needs a snooze button

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David B. Armstrong

As the story goes—and I’m testing my memory since I’m still reading the Steve Jobs biography—Rip Van Winkle drank some funky booze, slept for 20 years, and missed the American Revolutionary War.

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But what if it was a different period of time and he invested a ton of dough right before he sipped some of the booze?

See one of my recent posts for data supplied by JPMorgan Asset Management that looks back over 61 years. Using the S&P 500, they determined that the 20-year rolling periods from 1950 to the end of 2010 produced returns as good as +18 percent and as poor as +6 percent. They also determined that the average annual total return for the S&P 500 was 10.9 percent over those years.

In other words, it turns out if he had slept for any one of those rolling 20-year periods, the worst he would have done was +6 percent, and he could have done as well as +18 percent.

In fact, if he drank more of the same booze on New Years Eve of 1949 than he did in the story and slept for 61 years instead of 20, he could have had an average annual rate of return of 10.9 percent. Given those returns, I suppose he would have thought, “Wow, it seems like the past 61 years were pretty darn good!”

Of course, we all know that he would have slept through several horrible wars, the Cold War, stagflation, oil embargoes, double-digit interest rates, impeachment hearings, the 9/11 attacks, and oh yeah, the world almost being destroyed by nuclear weapons during the Cuban Missile Crisis.

So for the individual investor, I have this: The story holds true for this past year as well.  If you had gone to sleep on January 1, 2011, woken up on December 31, and checked the S&P 500, you would have seen that stocks were essentially unchanged for the year. The S&P 500 finished the year 0.04 points below its level prior to the opening bell on January 1, 2011. That’s just about a 0 percent return (not counting dividends).

Just as old Rip would have slept through all those hardships, so too would you have slept through some tough times and extraordinary events: the European debt crisis, the Arab Spring (complete with regime changes in Egypt, Tunisia and Libya), escalating tensions over Iran, a tsunami and nuclear catastrophe in Japan, the death of a leader in North Korea, U.S. political turmoil, and a volatile August where 60 percent of the trading days saw moves of greater than +/- 1 percent in the S&P 500.

I’ll bet that the people that “slept” through 2011 did a heck of a lot better than those investors that tried to manage their way through the year. The year was full of doom, gloom, and the “I saw the whole thing coming” predictors. It was also full of anxiety. The Rip Van Winkle that slept through 2011 probably experienced a lot less anxiety than the people trying to “do something” last year. 

How do you sleep through 2012? Formulate an investing strategy and stick to it. Base your investment decisions on either your immediate need for liquidity or on a long-term strategy within a complete financial plan, despite any fear or anxiety you may feel.

And if you don't have a plan, please get one in 2012.

David B. Armstrong, CFA, is a managing director and cofounder of Monument Wealth Management, a full-service wealth management firm in Alexandria, Va. Monument Wealth Management is backed by LPL Financial, an independent broker-dealer and Registered Investment Advisor. David has been named one of America's Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 and 2010, based on assets under management) and has been interviewed by several national media sources over the past several years. Follow David and Monument Wealth Management on their blog Off The Wall, on Twitter at @MonumentWealth and @DavidBArmstrong, and on their Facebook page. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. All performance references are historical and are not a guarantee of future results.

All indices are unmanaged and may not be invested into directly.