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Compounding Wisdom: Adapting Einstein’s Insights to Modern Financial Markets

Albert Einstein, celebrated as one of history’s most brilliant minds, profoundly stated, “Compounding is the eighth wonder of the world and the most powerful financial force in the universe." This principle has been the cornerstone of our approach at our firm, guiding our analysis of market cycles over the last 40 years. Our extensive research and practical experience have led us to question and ultimately move beyond traditional buy-and-hold investment strategies, especially for individual investors.

Re-evaluating Buy-and-Hold

Our early advisory experiences in the 1980s revealed that most individual investors were ill-suited to the buy-and-hold strategy during periods of significant market downturns. Observations indicated that when facing a market drop of 50% or more, investors frequently abandoned their investment plans, thereby locking in substantial losses. Furthermore, their exit from the market typically resulted in prolonged periods in cash, causing them to miss critical recovery phases in bull markets which often followed the downturns.

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10 Best & 10 Worst Quarters: S&P 500 Index 1950-2023

The origins of the buy-and-hold philosophy trace back to a post-crisis strategy developed by the mutual fund industry following the severe 1973-1974 bear market, which wiped out nearly 40% of the mutual fund landscape. In response, the industry promoted a study suggesting that missing just the ten best trading days could severely reduce overall investment returns. While compelling, this narrative only told half the story, neglecting the devastating impact of the worst market days.

Comprehensive Analysis of Market Cycles

To counter the incomplete insights provided by the industry, our firm conducted an in-depth study of the S&P 500 Index covering the period from 1950 to 2023. We focused on the ten best and ten worst quarters to gauge their impact on investment growth. Our findings were striking:

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The Power of Compounding
  • An initial investment of $100,000 in 1950, if left untouched, would grow to $28,408,755 over 74 years under a strict buy-and-hold strategy.

  • Missing the ten best quarters reduced the final amount significantly to just $5,504,166.

  • Conversely, avoiding the ten worst quarters could increase the potential final tally to an astounding $253,069,437—almost nine times the return of a traditional buy-and-hold approach.

  • Interestingly, if an investor managed to avoid both the ten best and ten worst quarters, the investment would still appreciate to $49,031,736, nearly double that of the traditional approach.

Theoretical and Practical Insights from Modern Portfolio Theory

Modern Portfolio Theory (MPT) has provided a framework to assess and manage the risk-return trade-off in investment portfolios. It introduces quantitative measures like Beta, which assesses an investment’s volatility relative to the market, and Alpha, which measures an investment's performance relative to a benchmark. Applying these concepts, we have developed strategies that not only manage risks but also enhance returns by focusing on minimizing losses more than capturing every top market performance.

Strategic Portfolio Risk Reduction By Design

Market dynamics have shifted significantly over the past two decades, challenging the effectiveness of traditional portfolio design strategies. Prior to the widespread adoption of the internet, managers could effectively incorporate non-correlation into portfolios using a style box asset allocation approach. However, the instant availability of investment information today tends to fuel a "herd mentality." This phenomenon leads investors to act out of fear, often selling indiscriminately across asset classes, which undermines the benefits of diversification and risk reduction. To counteract this, modern investors must embrace diversification through a variety of investment styles or management approaches. By integrating passive, active, and alternative strategies, investors can achieve better non-correlation, ultimately reducing both risk and potential losses.

Innovative Investment Products

In response to these insights, WBI has developed a range of innovative investment strategies over the past three decades:

  • Cash Hedged Portfolios: These portfolios utilize a long-only strategy but switch to cash during periods of market decline to protect capital. Recent underlying technology advancements have helped to improve up market capture without compromising capital protection.

  • Trend Switch Portfolios: This strategy employs a sophisticated blend of technical and fundamental data to dynamically manage risk and return, adapting to market conditions. Using advanced machine learning algorithms, this approach synthesizes massive amounts of data to predict weekly returns to improve signal quality.

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  • Power Factor Portfolios: Targeting stocks with strong fundamentals and growth potential, these portfolios are constructed based on detailed factors analysis of high-yield dividend stocks, and growth-focused firms. Portfolios are rebalanced quarterly to optimize holdings by capturing fresh fundamental data and market trends which helps to maximize return and mitigate risks.

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  • Cy Multi-Manager Model Portfolios: optimizing the blend of passive, active, and alternative management styles to maximize risk-adjusted returns. By focusing on managers with the highest risk adjusted returns and then optimizing portfolio holdings to maximize non-correlation and covariance strategies can be designed to meet client personalized benchmarks for loss and return.

Conclusion: Adapting to New Market Realities

The transformation of market dynamics, especially with the advent of the internet and the resultant 'herd mentality,' necessitates a reevaluation of traditional portfolio management strategies. By employing a diversified strategy that includes both cutting-edge analytics and a nuanced understanding of market cycles, our firm aims to provide robust returns while managing risks effectively. This approach honors the profound truth of Einstein’s view on compounding, tailored for the complexities of today’s financial landscapes.



Unless otherwise indicated all performance is sourced from Bloomberg.


The views presented are those of the authors and webinar or podcast hosts/participants, and should not be construed as investment advice. The authors, podcast participants, webinar hosts, or clients of WBI Investments, LLC (WBI) may own stock discussed in these insights. WBl is an investment adviser in New Jersey. WBl is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. WBl only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of WBI's current written disclosure brochure filed with the SEC which discusses among other things, WBI's business practices, services and fees, is available through the SEC's website at: This site contains links to third-party websites. WBl does not endorse, approve, certify, or control these websites and does not assume responsibility for the accuracy, completeness, or timeliness of the information located there. Your access to and use of such websites is governed by the terms of use and privacy policies of those sites, and shall be at your own risk. WBI disclaims responsibility for the privacy policies and customer information practices of third-party internet websites.

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