Performance Expectations for Defensive Investors

A defensive investor is an investor who seeks to preserve principal as their primary objective and seeks stable returns with as little speculation as possible. They take a long-term view and aim to grow their wealth through steady investments.

1965: The Golden Age of Investing

The year 1965 was one of the golden years in the history of investing. The U.S. economy was growing, and corporate profits were steadily increasing. In this environment, both bonds and stocks offered high returns.

Bonds: In 1965, you could expect a pre-tax return of about 4.5% per year from a well-rated bond investment, which was a very attractive return compared to prevailing interest rates at the time. Long-term bonds, in particular, offered high coupon rates and guaranteed principal at maturity, which allowed investors to pursue both stable returns and principal safety.

Stocks: In 1965, investors could expect a pre-tax return of around 7.5% per year from investing in blue-chip stocks, which was higher than bond yields and an attractive investment option. In particular, stocks of companies with high growth potential offered even higher returns through higher dividends and stock price appreciation, which allowed investors to pursue wealth growth over the long term.

A balanced portfolio of bonds and stocks: Investors were able to build their investment portfolios with the right mix of bonds and stocks in the right proportions. In 1965, an investor could expect a pre-tax return of about 6% per year if they invested in a 50:50 ratio of bonds and stocks. That was a return that wasn't as safe as investing in bonds, but it wasn't as risky as investing in stocks either. A balanced portfolio allowed investors to seek a stable return while spreading their risk.

Post-1965: Increased volatility in bond yields

After 1965, bond yields rose to record levels before peaking in 1970 and falling sharply. This was the result of a combination of factors such as the Vietnam War leading to increased US government fiscal deficit, inflation, and rising interest rates by the Federal Reserve to curb inflation. These changes had a major impact on the bond market, leading to falling bond prices, rising bond yields, and difficulty for investors in earning stable returns from bond investments.

Mid-1971: Signs of Recovery

In mid-1971, bond yields began to rise again as economic conditions improved. The stock market also showed signs of recovery. By mid-1971, a well-rated bond investment could earn a pre-tax return of about 8% per year, lower than the 1965 level but a significant recovery from the declining returns since 1970. Investing in blue-chip stocks could generate a pre-tax return of about 7.5% per year, the same as in 1965 and a significant recovery from the declining returns since 1970.

Investment strategies

In mid-1971, it was still important for investors to construct an investment portfolio with the right mix of bonds and stocks in the right proportions. Investors needed to consider their investment goals, risk tolerance, and investment knowledge and experience to choose the right investment strategy.

Implications

Past investment returns are no guarantee of future returns. Investors should pay close attention to market conditions and develop an investment strategy that fits their investment goals and risk tolerance. It is important to invest for the long term and to be consistent.

Conclusion

By analyzing the expected returns of defensive investors in 1965, post-1965, and mid-1971, we can see that investment markets are volatile. Since volatility is psychologically painful for defensive investors, a portfolio balanced between bonds and blue-chip stocks will perform well over the long term if the defensive investor's goal is to seek stable returns and preserve principal.

1. The Concept and Goals of Aggressive Investing

The term "aggressive investor" refers to investors who aim for high returns. These investors apply a variety of strategies to achieve their goals, ranging from broad-based trading to short-term and long-term stock picking. However, each method has elements that require careful consideration, and it is important to understand and apply them well.

2. Types and Characteristics of Aggressive Investment Strategies

1. Trading

   Seeking profits by buying in bull markets and selling in bear markets.

   • Pros: High returns can be achieved in a short period of time.
   • Cons: To be successful, your short-term and long-term forecasts must be correct, and it's hard to get a competitive advantage with this method because the performance is already publicly available.

2. Short-term Stock Picking

   Buying stocks in anticipation of favorable announcements.

   • Pros: High returns in a short period of time.
   • Cons: Requires quick information acquisition and analytical skills, and may be less likely to succeed due to high competition.

3. Long-term Stock Picking

   Investing in the future growth potential of past growth companies.

   • Pros: Higher returns over the long term.
   • Cons: Requires accurate company analysis skills, and long-term investments may limit liquidity.

6. Realistic Evaluation of Aggressive Investment Strategies

Aggressive investing is an attractive investment strategy, but it also involves high risk. Investors should carefully select an investment strategy based on their investment goals, risk tolerance, and investment capabilities. To successfully implement an aggressive investment strategy, it is essential to have excellent market analysis skills, the ability to quickly acquire and analyze information, good company analysis skills, extreme patience, and prudent risk management.