Robert Lloyd, CFA
Wounds that never heal
The analysts at GMO (Grantham Mayo Van Otterloo) produced an interesting chart they
called "Wounds that never heal". They were trying to measure the time required for
equity markets to achieve a long-term average real return of 6% after a bear market (real
return means nominal return adjusted for inflation). By adding the bear market losses to
bull market returns, you get a sense for how long it takes to get back to long-term average
This is another way of looking at the time for markets to recover from a bear market. It
also confirms that people who invest in stocks at market tops sometimes have to
wait decades for the portfolio returns to catch up to the long-term averages that are
initially hoped for. GMO's choice of a 6% long term equity return is significant because it is
to what many financial planners use in their planning software.
This is a key reason why we are underweight equities at this point in the Fed tightening
cycle. We sincerely hope to avoid the pain of capital losses and reinvest our bonds and
cash at more attractive valuation levels.
Robert Lloyd, CFA®
Chief Investment Officer
Lloyds Intrepid Wealth Management
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