“Off the Wall” blog
Unique, straight-forward, unfiltered opinion on topics of concern for individuals with newfound wealth.
When winning sucks
By David B. Armstrong, CFA | May 05, 2020 | Weekly Market Commentary
Last week I wrote about why being boring is so hard.
“To most people, a reality TV show is more interesting, more “binge-able,” than a documentary about the different species of ferns.
Investing is boring. And it should be. But that means it’s tough to stick with it – especially when there are mediums exposing you to stories, drama, and competition.”
I also wrote about it in June 2019.
“Investing is not a contest or a game – your benchmark should be progress toward the success of your plan and reaching your goals.”
Boring investing is one thing…but, what about when you overcome the boredom, and the result still feels like, “This SUCKS!”?
Winning can still feel like it sucks.
Let me show you using some data from Morningstar and a hypothetical portfolio that is the definition of boring.
I’ll call this portfolio, “The Snoring, Non-roaring, Abhorring Portfolio” – or “SNAP” for short. (That took me 30 minutes by the way.)
The SNAP portfolio is 60/40 and looks like this:
- Equity 60%
- 40% S&P 500 for domestic exposure
- 15% MSCI EAFE Index for the international piece
- 5% Russell 2000 for small-cap
- Fixed Income 40%
- 30% Barclays Aggregate Bond Index for the U.S. fixed income
- 10% Barclays U.S. Corporate High Yield Index…just to spice things up a little bit
Now imagine having, AND HOLDING, that boring-ass SNAP portfolio for 20 years, all the way back starting on March 31st, 2000.
With that in mind, let’s review returns (rounded) and a made-up, yet conceivably true, investor reaction:
- From April 1st, 2000 through December 31st, 2002
- S&P 500: -39%
- SNAP: – 18%
- Investor reaction: “The SNAP portfolio sucks, I lost money, I’m going to cash.”
- From January 1st, 2003 to December 31st, 2007
- S&P 500: +83%
- SNAP: +74%
- Investor reaction: “Ehhh, I did ok.”
- From January 1st, 2008 to December 31st, 2008
- S&P 500: -37%
- SNAP: -24%
- Investor reaction: “The SNAP portfolio sucks, I lost money, AGAIN! I’m going to cash.”
- From January 1st, 2009 to December 31st, 2019
- S&P 500: +351%
- SNAP: +192%
- Investor reaction: “I paid my advisor a fee for the past ten years for his “diversified portfolio,” and I would have been better off just holding the S&P 500 for no fee!”
- From January 1st, 2020 to March 31st, 2020
- S&P 500: -20%
- SNAP: -13%
- Investor reaction: “The SNAP portfolio sucks, I lost money for the THIRD TIME DURING a market selloff AND didn’t make as much money as the S&P 500 when it went up. THIS SUCKS.”
- Total Return from March 31st, 2000 to March 31st, 2020…
- S&P 500: +155%
- SNAP: +176%
- Investor reaction: “The SNAP portfolio seems like it sucked, but over the past TWENTY YEARS, I ended up making more than the S&P 500. That actually DOESN’T SUCK!”
To understand why this is, go back to a blog I wrote on April 13th which shows a graph called “The Return Needed to Reach Breakeven.”
This graph shows the return required to get back to breakeven after a sell-off. For example, when the S&P 500 sold off nearly 40% in the first period of my example above (April 2000 – December 2002), it took a return of 67% to get back to even. Conversely, the 18% SNAP sell-off required less than a 25% return to breakeven.
That’s why it feels like it sucks even when you are actually winning – the perception of the subsequent +83% return on the S&P 500 versus the +74% return for the SNAP portfolio is out of context relative to the previous period returns.
I know a lot of people in my industry try to sell the sizzle…the hot idea or product that sounds smart and exclusive. I think they are selling feelings, emotions, excitement…a story. And in the end, it’s usually bunk.
This drawing from Carl Richards (@behaviorgap) sums up a lot. (Used image with permission.)
With that in mind, remember this: I think most of the success you have as an investor comes down to two big things that you can control, with or without an advisor –
- Knowing and playing YOUR OWN game, and no one else’s
- Realizing that most of the returns you achieve over a lifetime will be dependent upon just a few key lifetime decisions…and those decisions are generally related to your behavior – good or bad.
Personally – I think investors are more successful in controlling those things with the help of good advice from a good advisor.
As for now, I’ll encourage readers to eschew all the forecasts being offered by people stupid enough to pay the placement fees to get on the business news (noise) channels – they are meaningless. People forecasting earnings, people forecasting GDP, people forecasting interest rates, and future inflation – they are all full of shit and it’s nothing but noise.
No one has any more of a clue what May 2021 will look like than they did about what today would look like back in May 2019.
My opinion? We will progress – it’s what we do as humans. The world, the economy, and the market will improve. It’s just that no one knows when.
The catch is that improvement will happen too slowly for anyone to really notice.
Keep looking forward,
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