Ted Williams and the Sequence of Returns Wednesday, May 15, 2019

Miller/Howard Investments www.mhinvest.com/blog @mh_investments

Ted Williams and Joe DiMaggio each hit a single on this date in 1941. It would turn out to be the begin- ning of career-best, longest hitting streaks for both. Ted Williams’ hitting streak ended after 23 games. Joe DiMaggio, of course, went on to hit in 56 consecutive games — a record that still stands 78 years later. DiMaggio won the MVP that year while Williams finished second, by a vote total of 291-254. Their 1941 accomplishments are widely considered to be two of the greatest performances in baseball history. Despite missing out on the triple crown by 5 RBI (Joe DiMaggio led the league with 125 RBI), Ted Williams set his own record in 1941 that still stands today. He was the last baseball player to finish a season with a batting average above .400. Ted Williams’ batting average was .339 when his hitting streak began and rose to .431 when his streak ended on June 7. His average would briefly dip below .400 in July but re- mained above .400 in August and September. He ended the season batting .406. In an amazing feat of consistency — Williams’ longest hitless stretch in 1941 was 7 at-bats. And yet he was hitless in 30 of the 143 (21%) games he played in that year. Which leads us to the importance of the sequence of returns when evaluating investments. Hitting .406 for the season is equivalent to going 2 for 5 every game. But they are equivalent, not the same— especially for the fans who attended one of his 30 hitless games. Williams went 2 for 5 in only 4 of the 143 games he played that season. Continued on next page.

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14%

12%

10%

0% 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2018 Source: Morningstar Direct; Ibbotson® Stocks, Bonds, Bills, and Ination.

Similarly, using Dr. Roger Ibbotson’s long-term stock market returns, the rolling annualized 30-year total return of large company stocks has averaged 11.2% since 1926. And yet none of the 92 years had a calendar year return of exactly 11.2%. In fact, large company stocks returned between 10%-12% in only six calendar years. Real world results for individual investors may have deviated from long-term averages depending on their entry point and the sequence of returns. In individual calendar years, investors were just as likely to see returns of -20% and much more likely to see returns of +20%.

Calendar Year Returns of US Large Company Stocks Number of Years within Stated Range

Greater than 20% GAIN 34 Greater than 10% GAIN 54 Between 10%–12% 6 Greater than 10% LOSS 11 Greater than 20% LOSS 6

0102030405060 Number of Years

Source: Morningstar Direct; Ibbotson® Stocks, Bonds, Bills, and Ination; and MHI Research and Analysis.

The distinction becomes more important for investors harvesting income from their equity portfolios. Assuming a 5% withdrawal rate with annual withdrawals adjusted for inflation, and using Ibbotson’s large company stock returns, investors would have run out of money in 10 of 63 rolling 30-year periods. Continued on next page.

Ted Williams and the Sequence of Returns—Wednesday, May 15, 2019 page 2

Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/28/2021 Ending Market Value after 30 Years with 5% Annual Withdrawal $1 Mil Starting Investment in Year Indicated Annual withdrawals adjusted for ination $30 Million $25 Million $20 Million $15 Million $10 Million $5 Million $- $(5 Million) $(10 Million) 1926 1927 1928 1929 1930 1931 1932 1933 1935 1936 1937 1938 1939 1940 1941 1942 1943 1945 1946 1947 1948 1949 1950 1951 1952 1953 1955 1956 1957 1958 1959 1960 1961 1962 1963 1965 1966 1967 1968 1969 1970 1971 1972 1973 1975 1976 1977 1978 1979 1980 1981 1982 1983 1985 1986 1987 1988 1934 1944 1954 1964 1974 1984

Source: Morningstar Direct; Ibbotson® Stocks, Bonds, Bills, and Ination; MHI Research and Analysis.

Looking at 1926-2018, the chart below shows total returns for the 10 instances when money would have run out before the 30-year period ended (years shown in red bars in chart above).

Annualized 30-Year Total Return Number of Years Before Money Runs Out (Investment Start Year) 35 14 % 30 29 12.7 28 28 11.9 12.1 12% 10.7 10.7 25 10.3 10.5 23 10.0 22 10% 9.2 20 20 8.5 20 19 19 8% 17 15 6%

10 4%

2% 5

-% 0 1929 1930 1962 1964 1965 1966 1967 1968 1969 1973 1929 1930 1962 1964 1965 1966 1967 1968 1969 1973 Average Total Return Year

Source: Morningstar Direct; Ibbotson® Stocks, Bonds, Bills, and Ination; and MHI Research and Analysis.

High inflation during the 1970s was a powerful force, but the sequence of returns was an important factor. Large company stocks returned 11.9% annualized in the 30-year period starting in 1967, almost identical to the 12.1% annualized return in the 30 years starting in 1968. And yet the investor starting in 1967 ran out of money in year 29 while to an investor starting in 1968 would have exhausted their portfolio in year 20. The reason for this 9-year disparity was a 20% return in 1967, which the 1968 investor missed by 1 year. Put another way, the hypothetical investor would have run out of money in retirement, in essence batting .000, in 16% of the 30-year periods—though you would never have guessed it by looking at total returns for these periods. The accumulation phase of an investor’s lifecycle has dominated discussion in the financial industry—but tools to analyze the wealth spend-down phase are lacking in comparison. We believe, for investors nearing or entering retirement, dollars are more important than percentages.

Ted Williams and the Sequence of Returns—Wednesday, May 15, 2019 page 3

Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/28/2021 Steve chun has been with Miller/Howard since 1999. He has been instrumental in setting company strategy, guiding product development, and managing the sales eﬀ orts of both the internal and external sales teams. He works closely with the portfolio management team to craft the Miller/ Howard message (for both internal sales teams and key external partners), and to develop new investment strategies based on Miller/Howard’s core competencies. Steve received a BA in American Literature from Bard college. Steve Chun Director of Marketing Product Development

Definitions and Disclosure Ibbotson® Large Company Stocks Index is represented by the S&P 500 Composite Index (S&P 500) from 1957 to present, and the S&P 90 from 1926 to 1956. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the US and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Source: Ibbotson® Stocks, Bonds, Bills, and Inflation. Source: Baseball-reference.com Opinions and estimates offered constitute Miller/Howard Investments’ judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. Analysis does not include transaction costs, taxes, and fees. The information contained herein is obtained from multiple sources and believed to be reliable; however, we have not independently verified this information. Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment. The information provided should not be considered a recommendation nor should it be considered investment advice. It does not take into account an investor’s individual circumstances. Past performance does not guarantee future results.

Miller/Howard Investments is an employee-owned equity management firm with three decades of experience managing dividend-focused portfolios for institutions and individuals nationally. We emphasize high-quality stocks with high current dividend yield and strong dividend growth. Our portfolio management team has more than 175 years of collective experience in companies that pay and grow dividends. We offer environmental, social, and governance (ESG) portfolio options to our clients. Miller/Howard Investments, Inc., is a registered investment advisor focusing on multi-cap, core equity management and dividend strategies.

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