The Long Bull Market Has Redefined the Meaning of 'Long Term'

The arbitrary 10-year horizon for 'long-term' performance is becoming a problem

Author's Avatar
Jul 17, 2019
Article's Main Image

What is the long term? When does the short term become the long term?

In the investing world, a long-term time horizon is generally defined as 10 years. However, the incredible length of the post-Great Recession bull has actually begun to force a reevaluation of the conventional definition of the long-term.

Recession in the rearview mirror

Jeff Sommer of The New York Times addressed the pressing issue facing the traditional notion of the long-term:

"From Sept. 7, 2007 until March 9, 2009, the S&P 500 plummeted more than 50 percent in the worst bear market since the Great Depression. Until this spring, at least part of that horrendous decline weighed down 10-year stock market returns. But now, because of the arbitrary logic of the calendar, the miserable 2007-2009 bear market is no longer incorporated in 10-year returns. Yet for many practical purposes, the long-term horizon in investing is defined as just 10 years. That means investment returns appear to have brightened across the board."

Stock markets have always fluctuated, with bull markets and (usually much shorter) bear markets trading off from time to time. Bull markets usually last for several years, but the post-recession bull market of today has broken all records for length. Indeed, it has stretched so long that the scars of the last recession are no longer visible on the return prints of most investment funds.

10 years is the long term, and anything further back is just history. That is a dangerous distortion of what actually happened, leaving reported returns and performance under-appreciating the potential impact of another downturn. That is a dangerous place to be.

Lulled by low volatility and great returns

The strong and stable returns to the stock market since the end of the Great Recession may also be contributing to dangerous complacency. Jason Kephart, senior manager research analyst at Morningstar, offered an excellent example of this point in a recent article on the performance of Vanguard’s popular two-fund mutual fund, which allocates a 60-40 split between U.S. stocks and U.S. bonds:

“The results showed that the portfolio’s 10-year annualized returns of 10.79% over the period ended April 30, 2019, were the third-best out of the 198 rolling 10-year periods we looked at (the best was the 11.69% annualized return for the period ended Feb. 28, 2019, so apologies to readers for being two months late on catching this phenomenon).”

Unsurprisingly, this long run of strong performance has won Vanguard many converts. Stellar returns over the past decade have certainly comforted many investors. But it is about more than mere returns. As Morningstar’s Kephart pointed out, the astonishingly low volatility to the Vanguard two-fund mutual fund has also won attention:

“Not only were the returns in the top 1% of the periods we looked at, but the portfolio’s 7.61% annualized standard deviation (a measure of volatility) was the lowest out of the 198 periods…Putting those risk and return characteristics together, not only has it been one of the most profitable times for this two-fund portfolio, it’s also been the smoothest ride to get there. This translates directly to the fund’s risk-adjusted returns, as measured by Sharpe ratio, also being in the top 1% of periods we looked at.”

Lulled by low volatility

These factors -- the Great Recession going down the market memory hole and record-level returns with historically low volatility -- have made for a rather toxic brew. Investors are facing one of the most uncertain markets in years, even as virtually all asset classes continue to test new highs.

In essence, investors have lost a key tool for assessing how various securities, asset classes and funds perform during bad markets right at a time when such information is becoming especially important.

Investors need to take a wider view of what the long term really means, lest they get caught making poor decisions based on incomplete information.

Disclosure: No positions.