Advisors and mutual fund companies hawking low-volatility funds and other investment vehicles that play upon the public’s misplaced fears about volatility in the equity markets are performing a major disservice, Nick Murray told attendees at this year’s Financial Advisor Retirement Symposium on April 1 in Las Vegas.
“We [as an industry] are pandering to volatility and doing everything in our power to convince the public that volatility and risk are the same when they are two very different things,” Murray said.
With an assist from the financial services business, the public believes that volatility is a synonym for “down a lot in a hurry.” In reality, it is the underlying cause of the equity risk premium.
The “only reason” why the long-term trend line for equities is superior to all other financial assets is that it is prone to run above and below that trend line, often for extended time periods, Murray said. Between 1980 and 2014, the average intra-year decline in the S&P 500 is 14.2 percent.
Investors experienced 20 percent declines in 1990 and 1998 and a loss of more than 30% in 1987. Worse still were the more prolonged losses of 46 percent between 2000 and 2002 and 57 percent between 2007 and 2009.
“Why would anyone want anything to do with this asset?” Murray asked, answering his question by noting that the S&P 500 began 1980 at 106 and ended 2014 at 2,059.
“You own equities because they go down temporarily and up permanently.”
This is particularly compelling for retirees seeking to maintain their purchasing power over several decades. Citing the 1980-2014 time frame, he noted that while the index was up 19 times without dividends, the dividends themselves increased seven-fold while the CPI increased three-fold.
“The ride is the reason for the return,” he noted. There has never been “an engine for increasing purchasing power like mainstream equities.”
Murray commented that, in a sense, it’s hard to blame the money management industry because they are part of a culture that has a business imperative requiring managers “to make their numbers.” He did not add that the asset management business has helped foster that culture.