One of the Most Important Lessons of Investing: Declining or Lackluster Markets may be Predictive of Gains

One of the Most Important Lessons of Investing: Declining or Lackluster Markets may be Predictive of Gains
January 7, 2016 phillip_toews_1p9l0e9h

Since 1915 the stock market has gained 10% per year (1). However, those returns aren’t provided to investors equally every year. Instead, some years deliver losses, and others provide low single digit returns. High return years, when the markets move up by 20% or more, occur infrequently but have produced 66% of stock market gains over the past 100 years (2). If investors missed these high return years, they would have missed the bulk of market gains.

The markets continually tempt investors to get out of stocks (or high yield bonds) before realizing big gain years. This happens in one of two ways. The most obvious way that this occurs is when the markets lose value. Losing markets can be mild or severe and can last for several years. Investors evaluating losing portfolios view losses as a portfolio failure. If losses are realized for several years in a row, they conclude that anything is better than their current allocation and make a change. The change can be satisfying, but risks moving them out of markets before high return years occur.

A second temptation away from big gain years is caused by lackluster returns. Investors like to see progress with their portfolios. So when they go nowhere for 1, 2, or 3 years, people look for alternatives.

Which brings us to what we feel is one of the most important lessons of investing: Declining or lackluster markets may be predictive of gains ahead. The lower that stock prices move, and the longer that periods of lackluster returns persist, the more significant gains are expected to be. This is the opposite reaction to market moves that investors instinctively have and is one reason that investing proves to be difficult for so many investors.

The Markets in 2015

Over the past year, the global stock market lost 1.8%. The past two years combined produced anemic gains of just 2.9% (3) before fees. High Yield Bonds have fallen by 2.2% (4) over the past two years. This has happened with a backdrop of investor dread following the financial crisis and anxiety over the potential of similar losses being produced as the Federal Reserve Bank ends its period of monetary stimulus. Toews exited the markets mid-year during a market rout that saw the S&P 500 decline by as much as 12%, but re-entered later in the year. The Toews system finished the year partially defensive, with High Yield Bonds and International Stocks out in money market instruments, and US Stocks invested.

Market Environment

Stock earnings declined again in the fourth quarter. Current predictions are that S&P 500 (“S&P”) companies’ earnings will decline by 4.7% (5) during the recent quarter. If this holds true, it will mark the first time the index has seen three consecutive quarters of year over-year declines in earnings since 2009.

Yet, the S&P continues to value stocks highly, at over 20 times trailing earnings (6). Stock markets have begun the year with losses. Frankly, it would likely benefit our investors more if markets would move into a full-fledged decline, allowing us to exit markets and re-enter at better prices.

The path to navigate these markets and address possible significant declines is straightforward but requires constant vigilance: 1) stay committed to equity markets, historically the best performing asset class to help protect against inflation and 2) hedge your portfolios against losses. Both are pillars on which the Toews system is built.


Prior performance is no guarantee of future results. There can be no assurance, and individuals should not assume, that future performance of any of the portfolios referenced will be comparable to past performance. There can be no assurance that Toews will achieve its performance objectives.

This commentary may include forward-looking statements.  All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”).  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.

This commentary is intended to provide general information only and should not be construed as an offer of specifically-tailored individualized advice.  Please contact your investment adviser, accountant, and/or attorney for advice appropriate to your specific situation.

This document refers to the performance of the majority of Toews portfolios to illustrate the effect of Toews management on US and intl. stocks and high yield bonds. Performance of individual accounts varied based on the client’s investment risk profile and their specific investment funds. For your individual account performance, please refer to the enclosed quarterly statement or the quarterly statement recently sent to you. In addition, not all model portfolios were referenced in this letter. It is not, nor is it intended to be, a comprehensive accounting of Toews asset management. There are other portfolios that Toews manages that performed differently than what is referenced in this letter. For a complete list of GIPS firm composites, their performance results and their descriptions, as well as additional information regarding policies for calculating and reporting returns, please go to Toews Corporation acts as the investment advisor that implements the asset allocation and models for each of the portfolios. Investors cannot invest directly in an index.

(1) Source: S&P 500 Returns – Global Financial Data
(2) Source: Global Financial Data
(3) Source: Bloomberg. MSCI ACWI Index 12/31/13-12/31/15
(4) Source: Bloomberg. ML HY Cash Pay 12/31/13-12/31/15
(5) Source:
(6) Source: