The Magic of Compounded Returns

The Magic of Compounded Returns

Posted on July 14, 2012

Current Market State 6 = Long term Bullish; Volatile; Short term negative but oversold (oversold means rebounds are likely)

The markets have had many irrational fluctuations, within a trading range, as a result of the unpredictable daily news from the Euro Zone. The Canterbury Volatility Index is still reflecting an irrational market but risk is declining.

The Magic of Long-Term “Compounded Returns”

Generating long-term “compounded returns” means the dollar value of a portfolio grows geometrically. For example, a base of 100, compounding at a 100% rate, increases to 200 and then 400, 800, 1600, 3200, etc. Long-term compounded returns may sound simple but have been almost impossible to achieve in volatile markets.

Fluctuation in the value of a security, or a portfolio, is the result of supply and demand and real-time pricing. By definition, fluctuation means values will move both up and down over time. This is just part of the price we pay for liquidity.

It is inevitable that portfolios will experience declines. “Acceptable declines” should not be viewed as losing money. Normal portfolio fluctuations should be considered no more than market noise and have little impact on long-term success.

Emotional and volatile market periods can lead to “unacceptable declines” and ruin the opportunity to benefit from “compounding” returns. Long-term investing is dominated by low probability and sometimes devastating events. It is important to understand the devastating impact of large short term declines on long term returns. For example, 50% loss requires a 100% advance to break even.

The Canterbury Portfolio Thermostat was created to generate consistent compounded returns by maintaining “acceptable fluctuations,” and avoiding “unacceptable declines.” The Portfolio Thermostat process can actually benefit and profit through changing market environments, and its methodology is, therefore, appropriate for almost any investor, regardless of age or objective.

The Canterbury Portfolio Thermostat Matrix identifies 12 different Market States (environments). Of the 12 Market States, 6 are Bullish Market States, 4 Market States are Bearish, and 2 States tend to precede a transition to a Bearish Market State, meaning caution.

Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom Hardin, Chartered Market Technician (CMT), makes all the final decisions on all investment and portfolio management decisions for Canterbury Investment Management. Tom has more than 30 years experience in the investment management industry and has broad breadth of knowledge. He is known as an innovator, educator and been revolutionary in the advancements in portfolio and risk management.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.