A new feature: Performance that matters

Analyzing markets through data that provides insight, not just information

Today we are introducing a new, regular feature to our site. One of my greatest frustrations during my days as an investment advisor (27 years before selling the practice in 2020) was seeing how many investors, professional or self-directed, relied completely on “generic” past performance data to assess markets.

I am all for reviewing the past to evaluate the present. It is one part of an investment strategy. However, time periods such as year-to-date, past 1, 3, 5 years, are “cookie-cutter” information, created by Wall Street firms to provide information and make it look like insight. There is some insight to be gained from standard performance time frames, but it involves a big element of luck. Why? Because market cycles do not obey our calendar. The market doesn’t care what day it is!

Creating something different: Performance That Matters

I have been creating and using tables like the one below for as long as I could access the data. I’ll go into more detail in coming weeks as we update this table and I highlight different parts of it. The goal of Performance That Matters is to focus our subscribers on the key time frames that I believe are the ones that allow for the most balanced analysis, not the lazy way out that so many financial firms take in presenting performance data to investors.

In particular, “year-to-date” performance is a Wall Street obsession, and has thus become an investor obsession. You can get that in a thousand different places. But it doesn’t really tell us much. That’s especially the case after 2022’s historic drops in stocks and bonds. It was the worst combined year in the last several decades. So I think it makes more sense to include that in evaluating just how well or poorly markets are doing.

Above you’ll find the table as of last Friday’s close (10/6/2023), sorted by the red highlighted columns, best to worst. Here’s a summary of today’s highlighted sections.

The key areas of this report going forward track performance of these 20 market indicators (all are ETFs that represent market benchmarks) since:

1/1/2022: this is when the stock/bond bear market really started to hit. So, citing 2023 returns without including 2022 is simply a way for investment firms to hope you forgot about the money you lost before you started making it back!

2/19/2020: this is the date of the S&P 500’s top prior to the onset of the Covid-19 pandemic. Let’s keep fresh in our minds that during 5 weeks in February-March of 2020 the S&P 500 index fell by 33%. The time it took to recover from that was time that investors were playing catch up instead of moving the ball forward, so to speak. And bonds during that time were still doing what they did for decades: provide an oasis when the stock market tanked. That doesn’t happen as reliably now as it did then.

YELLOW SECTION: For all time frames on this sheet, I’m showing you the total return (including dividends) and the annualized return. An index of the so-called FAANG mega-cap stocks plus a few others (10 stocks in total) have annualized a nearly 20% return since the pre-pandemic stock market top. That carried the S&P 500 to an 8.6% annualized return. If you asked investors what they thought the S&P 500’s total gain (not annualized) was over the past 3 years and 8 months, my guess is they say 50-100%, not the 34% gain that actually occurred. Perception versus reality. Human nature is to forget the declines once they fade with the passage of time.

Now, look at the rest of those yellow-highlighted figures. Collectively, they show just how tough it has been to make money since the start of 2022 and since early 2020, if you were “diversified” and didn’t just own what turned out to be the best performers, the FAANG stocks. In particular, the 4 allocation ETFs/benchmarks (AOA, AOR, AOM, AOK) represent mixes of stocks and bonds, ranging from 80% equity, 60%, 40% and 30% respectively. They are all still well off where they ended 2021, and their returns since 2/19/2020 are close to zero.

The last thing to note here for now is GOVI, which tracks a laddered portfolio of US Treasury securities from 0-30 year maturities. Bond ladders have historically been a way to protect portfolios from stock and bond market troubles. Yet since 2/19/2020, the bond ladder ETF is down 23%! That’s what happens when market cycles change.

ORANGE SECTION:

This column shows the “max drawdown” for each of the 20 benchmarks. That is, the actual percentage decline from peak to trough at any point since 2/19/2020. Especially if you are at the point in your career and life where, as they say, “you don’t want to have to go and make all your money all over again,” this is a good reminder that investment management = risk management. That’s my situation in life, and so you’ll see me write from that perspective almost all the time. Remember that downturns will happen, and there will be times when nearly any investment strategy will lose money. But just imagine how it impacts the thinking and emotions of an investor who is in a “conservative” asset mix (AOK), then sees it lose nearly 1/5 of its value at some point.

GREY SECTION:

This is what throws off many investors. They look at long-term returns and assume that every 10 and 15 year period will be like that, that it all just works out. More likely, the S&P 500’s 200% rise the past 10 years and nearly 450% gain the past 15 years are as good as it gets in any such time frame. It follows that it can only get worse.

This does NOT mean that the strategy going forward is to abandon stock market investing. In fact, it will be a major part of what you see in the ETFYourself.com model portfolios at all times. The key is HOW we use the equity and bond markets as a TOOL to get what we want out of the wealth accumulated. That is, the markets are not the end, they are a MEANS TO AN END.

This is why ETFYourself.com exists: to show investors another way, and to provide ongoing insight into and perspective on what I’ve learned in 30 years of managing other people’s money, and now my own. Thanks for joining us on this journey!