Risk and Return: Is the Juice Worth the Squeeze?
May 22, 2023
Below is a series of plots for the S&P 500 Index relating risk and return over three year “look back” periods beginning in 1990. Each dot represents the relationship between risk (the x axis) and return (the y axis) over a three-year period. As we roll through time, we add a new month, subtract the oldest month, and add a new “dot” to the chart. The oldest months are in light purple and the newest are in dark purple. The chart provides some interesting perspectives.
- While it is a widely held view that the more risk one takes, the more potential return one expects, we can see the chart calls this into question; at least for the past 33 years.
- It appears that during this 33-year cycle, as the market begins exhibiting higher volatility, returns start exhibiting a tendency to be more negative than positive.
- Our takeaway is that periods of heightened volatility threaten to erode return. This means as market volatility spikes, equity risk may not be rewarded. Put another way, when volatility is on the higher side, the risk that one loses money increases.
- The implication for investors is to understand that sometimes, making returns from broad market indexes is more challenging. Importantly, we are in one of those times now.
The Good News
Here is Microsoft compared to the S&P over the same 33-year period. You can see Microsoft is riskier than the broad market, but also has produced much better returns during risky periods. For Microsoft, the return juice HAS been worth the riskier squeeze.
On the other hand, look at GM, in this case, the extra risk has brought nothing but heartburn.
Our job at WealthPlan Group is to identify securities that we believe will provide sufficient returns for the risk we are taking on behalf of our clients. Our team of investment professionals works hard every day to assess the securities we believe will provide risk-compensating returns for the long haul. Thank you for your continued support.
Advisory services offered through WealthPlan Group, a DBA for WealthPlan Investment Management, a subsidiary Registered Investment Advisor of WealthPlan Group, LLC. WealthPlan Group, LLC is not a registered investment advisor, but is the holding company for WealthPlan Partners LLC and WealthPlan Investment Management, LLC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed.
No investment strategy can assure success or completely protect against loss, given the volatility of all securities markets. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. All performance referenced is historical and is no guarantee of future results. Securities investing involves risk, including loss of principal. An investor cannot invest directly in an index.
The information in this communication applies solely to the intended audience and in no way amends, revokes, or otherwise alters the existing agreements and relationships between WPIM and its clients. This communication is not a binding offer, expressed or implied. WPIM undertakes no obligation to update or revise the information herein or in any referenced third-party resource due to new information, future events or circumstances, or otherwise.
WealthPlan Investment Management (“WPIM”) uses data compiled and/or prepared by third parties (“Third Party Data”) in the delivery of Licensed Research and Data. Third Party Data is not owned by WPIM and user may be required to obtain permission directly from third parties for further use of Third-Party Data and may be required to pay a fee depending on the use contemplated by the user.