The investment objective for long term assets was reduced over 2 years ago to an annualized return target of at least 6.5%, over a market cycle (generally 7-10 years). The reason for the reduction in expectation was due to rising prices relative to underlying economics. In addition, the most recent market cycle was much longer than normal, which by itself is not a reason to anticipate a recession.
And then Covid-19 arrived which provides (at least) two reminders;
- Investment risk is not limited to only risks experienced in the past.
- The collective emotions of the market can quickly turn from greed to fear to greed very quickly.
In 4 short months, the S&P 500 declined 34% in five weeks and then advanced 44% in 10 weeks. But, the proper assessment of performance is not based on short-term results but results preferably over a full market cycle. And Covid-19 did officially mark the end of the last market cycle.
Broadly defined, a full market cycle is a period that contains a wide variety of market environments. The basic stages of a market cycle are:
• Bear Market: sustained period of negative returns of at least 20%.
• Recovery: the time period from market bottom until recovery to their previous peak.
• Bull Market: a sustained period of positive market returns
