The Leap Year Approach To Investing

by: Mark Hebner

Summary

Evaluating your portfolio on a four-year, leap-year schedule is a clever way to screen out short-term punditry in favor of long-term investment performance.

There's nothing special about four years per se - it could be 10 years; rather, the key benefit is time diversification.

Having a broader focus allows investors to tune out the irrelevant; this helps protect investors from becoming victims of their own emotions.

This year (2016) marks another special year for those who happened to have a significant event, like a birthday or wedding anniversary, fall on February 29th. The Leap Year, which is that extra day that we get every 4 years to help align our calendar year with an actual solar year (which happens to be 365.25 days), is upon us yet again. While many of us might just see this as just "another day," there are some real advantages to having four-year intervals in our lives. We propose that one of them is looking at your investment performance, assuming you are in a target date fund or have a passive advisor handling rebalancing, tax-loss harvesting and a glide path strategy for you.

Now this might sound a bit loony, but there is some real truth into what we are proposing. First of all, it allows investors to drown out the daily "noise" that the prognosticators, the "professionals," and the entertainers are delivering across the many media outlets. These outlets have become experts in delivering second by second accounts of random news stories and extrapolating them into "advice" with an overlay of overconfidence as if their ability to estimate market values and future events has the same precision as a Swiss watch. Unfortunately, many soothsayers are more often wrong than they are right, but the short-term attention and amnesia that affects all of us humans allows us to forget and repeat.

Once we take a big step back from the second by second clutter, we are able to take a deep breath and really see the irrelevance of it all. A Leap Year approach to investing is the embracing of this emancipation. Now, there is nothing unique to this approach in which we are trying to find some long-term market-timing trend that will allow you to outperform the market. Quite the contrary! This is about resetting your internal investment clock to be thinking in years - many years, that is - instead of seconds. It could have easily been the 10-Year High Reunion approach to investing or a welcome to a new decade approach to investing. But let's be reasonable. At the end of the day, what we are really talking about is the benefit of time diversification.

So what does this actually look like? Let's assume that an investor decided to start investing back on March 1, 1928 and made an agreement with their investment advisor to not discuss nor look at any performance figures until February 29th of the next Leap Year. May seem very unrealistic, but not as much as one would think. Unless something dramatic changes in somebody's financial situation (this does not include fear due to a short-term downturn in the market), then it doesn't seem so unrealistic that a 4-year window to chat and reassess could be practical. There may be things going on in the background like rebalancing and tax-loss harvesting, but we are just talking about looking at performance and reassessing financial goals.

Using historical performance data for IFA Index Portfolio 100 from March 1, 1928 through February 29, 2016, we have 22 independent 4-year time periods ending on a Leap Year (see table below). We know that past performance is no guarantee of future results, but we are going to be speaking more about the overall trend versus specific numbers. For example, over all 22 4-year periods, the average 4-year annualized return was 11.50%. The lowest 4-year period was during the Great Depression (1928-1931) where we saw an annualized return of -23.50%, or a painful total loss for the 4 years of 65.74%. This was subsequently followed by the highest 4-year annualized return (1932-1936), where we saw a 32.48% annualized return, which amounts to a total return of 208.06%. This would have gotten an investor back to the original investment amount from March 1, 1928 (8 years earlier). The third lowest Leap Year annualized return ended on February 29, 2012, which included the global financial crisis of 2008-2009, but still ended up with a 12.6% total return for the period.

Let's digress on this just a little bit. If we were to focus on the day-to-day news stories and volatility during that time, which included the fall of Bear Stearns and Lehman Brothers as well as the bailout of the biggest financial institutions in the world, like AIG (NYSE:AIG), and the economy had lost 800,000 jobs per month, we would have expected a much different story. It was a warzone. But once we expand our view, even during a very distressing time like 2008, it was just a blip.

Out of the 22 independent Leap Year periods, there were only 2 (9%) that had negative returns (both in the 1928 to 1940 period) and no negative Leap Year period returns since 1940.

Leap Year Returns of IFA Index Portfolio 100

88 Years (1/1/1928 to 12/31/2015) 22 Leap Years

4-Year Leap Year Periods Annualized Return Total Return
March 1, 2012 - February 29, 2016 6.18% 27.09%
March 1, 2008 - February 29, 2012 3.02% 12.64%
March 1, 2004 - February 29, 2008 10.54% 49.33%
March 1, 2000 - February 29, 2004 9.82% 45.43%
March 1, 1996 - February 29, 2000 12.12% 58.04%
March 1, 1992 - February 29, 1996 13.92% 68.44%
March 1, 1988 - February 29, 1992 13.82% 67.81%
March 1, 1984 - February 29, 1988 22.54% 125.46%
March 1, 1980 - February 29, 1984 18.49% 97.09%
March 1, 1976 - February 29, 1980 21.46% 117.63%
March 1, 1972 - February 29, 1976 3.23% 13.56%
March 1, 1968 - February 29, 1972 9.55% 44.05%
March 1, 1964 - February 29, 1968 18.29% 95.77%
March 1, 1960 - February 29, 1964 9.09% 41.65%
March 1, 1956 - February 29, 1960 10.39% 48.49%
March 1, 1952 - February 29, 1956 19.22% 101.99%
March 1, 1948 - February 29, 1952 18.44% 96.78%
March 1, 1944 - February 29, 1948 13.81% 67.77%
March 1, 1940 - February 29, 1944 13.32% 64.88%
March 1, 1936 - February 29, 1940 -3.14% -11.98%
March 1, 1932 - February 29, 1936 32.48% 208.06%
March 1, 1928 - February 29, 1932 -23.5% -65.74%
Click to enlarge

Source: ifacalc.com, ifabt.com, Index Fund Advisors, Inc.

We could also take a look at the monthly rolling 4-year returns from 1928 to 2015. This would include 1,009 4-year monthly rolling periods. The median annualized return across all 1,009 4-year periods was 13.42%. The lowest 4-year period was 06/1928 to 05/1932, where we saw an annualized return of -36.73%. Similarly to our observation before, the highest 4-year return came soon thereafter (03/1933-02/1937) where we saw a 56.22% annualized return.

Click to enlarge

Click to see the full interactive chart on IFA.com.

The Leap Year Review approach to investing is our way of resetting our investors' internal investment clocks. Investing is not about thinking in seconds, minutes, hours, days, weeks, months, or even 4 years. There is too much randomness to extract anything of benefit from these types of time periods. Having a broader focus allows investors to tune out the irrelevant. This will help to protect investors from becoming victims of their own emotions. We have shown using historical data the benefits of time diversification. Of course, this doesn't mean that the future will be so bright, but remember, from 1928 to 2016, there have been multiple wars, conflicts, economic booms and busts, stagflation, and differing economic policies (think FDR versus Ronald Reagan). Through all of this, markets have rewarded the patient investor. Believing that somehow this is going to change in the future is pure speculation.

Happy Leap Year!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.