All That Matters are the Results
SUMMARY:
Are you using a disciplined and consistent process to measure your investment results? Most people do not and, therefore, they have no idea how their investment strategy is really performing. Everyone should be comparing their investment results to the benchmark S&P 500 over long periods of time.
Investing is a numbers game, and it requires a disciplined and consistent method to measure results. No one does this the right way. Your investment professional doesn’t do this.
People like to track their investment results casually or even emotionally, not empirically. Many people have a rough idea of how their investments perform over time. It is on the statements we all receive. But they don’t compare their results to standard benchmarks like the S&P 500. If you have nothing objective to compare your results to, how do you know how you are doing?
I hear the following types of replies when I ask people about their investment performance:
“We have a gal (or guy) who is great. They have a knack for picking the right stocks. He/she got us into XYZ company two years ago and it has done really well.”
“I just looked at my statements and it showed that my investments had a 26% return over the last two years. I thought that was really good.”
“I’ve been using my person for the last ten years and I am very happy. They are beating the estimates from my retirement plan we developed ten years ago.”
“I do all my investing myself. I made a lot of money on lithium battery stocks (or marijuana company stocks, etc.) in the last couple of years."
But when you ask them how their entire portfolio has performed when compared to a benchmark like the S&P 500 over longer periods of time (3 years, 5 years, 10 years), you either get blank stares or mumbles. These are the same people who spend hours upon hours on the internet comparing prices on vacuum cleaners trying to save $50. But when it comes to tracking something that could be costing them hundreds of thousands of dollars or even millions of dollars, they don’t know and usually don’t want to know.
The above quotes are what we would call anecdotal evidence. You hear about the good stock picks, but you don’t hear about the ones that weren’t so good. And if they are comparing their results to the estimates created by their financial advisor, that is not the right comparison. Most investment advisors use conservative estimates like 4% or 5% per year in their financial projections because they don’t want their clients to run out of money. This is a good planning strategy but is not how you should be measuring results. Actual performance is different. An all-bond portfolio should generate 4% per year in the long term so it is ridiculous to compare total long term investment performance against bond performance. Do not compare your results to conservative financial plans that are designed to make sure you don’t run out of money.
People were happy with their returns for the ten years between 2012 and 2021. This was a terrific time in the stock market. The S&P 500 had an annual investment return of 15% per year without dividends and 17% per year with dividends reinvested over this same period. If someone had just invested all their long-term funds in an S&P index fund, they would have seen their investments quadruple in value over the ten-year period. $100,000 would have grown to $400,000 over those ten years. If people saw the value of their investments with their investment advisor double over the same time, they were probably happy. But if they knew that they really performed half as well as they should have, maybe not. And they are probably paying that advisor close to 1% per year for their expertise.
You should compare your investment results for your entire portfolio (not just your stocks) to the performance of the S&P 500 every year. Feel free to look at it, but performance comparisons over shorter periods of time (6 months, 3 months) are meaningless. One year is not enough to judge investment performance. Stock pickers can get lucky in a particular year. We need sustained performance over the long haul from our investment portfolios. A better evaluation begins with three years of results, but even that can be a little short sighted. A true picture or better indication of performance results emerges with five years or ten years or even 20 years of performance. Remember that only 8% of highly paid and expert mutual fund managers beat the S&P 500 over five years. That number drops to less than 1% at ten years and zero beyond ten years. I sincerely doubt that you or your investment advisor are better at stock picking than the highly compensated fund managers that have teams of highly trained analysts supporting them.
This table below represents the actual trading results of the BB&H system for the last three years. This is exactly how you want to track your investment results. You can see that the BB&H system outperformed the S&P 500 by two and a half times for the last 3 years. As we mentioned previously, the 2020 results which accounted for most of the overperformance was an aberration that was due to the unusual activity in the stock market for that year. Results for 2022 have been exactly as we would have expected for a bear market. The BB&H system has incurred a loss for the year but a much smaller loss than the S&P 500. You should construct a table like this for your investment portfolio from your investment statements. These results are all that matters at the end of the day.
| RESULTS ANALYSIS | | |
| BB&H | S&P 500 | DIFFERENCE |
2022 (at 11/4) | -8.3% | -21.0% | 12.7% |
2021 | 21.4% | 27.1% | -5.7% |
2020 | 58.3% | 16.1% | 42.2% |
| | | |
3YR. TOTAL | 71.4% | 22.2% | 49.2% |
All professional and serious investors use the S&P 500 as the standard benchmark for comparing investment results. Because most people don’t do this type of comparison, they have no idea how their portfolio is performing. They end up using the casual or emotional quotes that we listed above. I don’t want you just thinking that “my advisor is great, he/she knows how to pick winning stocks.” Just look at the facts. If your results are significantly below the results of the S&P 500, you need to change your investment strategy and approach. Some money managers may have built you a conservative portfolio that is only down 12% or 13% this year, which is very good, but you need to also look at how that portfolio performed in strong markets like 2020 and 2021. The three year or five year or ten year results are what really matters. You need a strategy that performs well in all market conditions. I challenge you to go back to 2012 and to compare your investment portfolio returns against the S&P 500 even without dividends.
It is so easy to buy an S&P Index fund or a Nasdaq index fund. You don’t need to pay anyone to manage your investment portfolio when you manage your investments this way. It is simpler, easier, and less expensive and, more importantly, you will get better investment returns. Nobody beats the S&P 500 over the long term. When you use this strategy along with the BB&H system, you will blow away the results of the top money managers on the planet.
Be well,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
Updated: Nov 28, 2022
SUMMARY:
We currently sit about 15% down for the year in the S&P 500 after being down by 25% a month ago (mid-October).
The S&P has climbed about 10% in the last month.
This bear market decline looks similar to the bear market of the 1970’s.
Technical analysts who rely on stock charts would say that we are still in a down trending pattern. But the technical analysts would become bullish if the S&P index continued to climb another 5% (breaking through the prior peak in mid-August) to over 4,300.
At eleven months into this bear market of 2022, it is a good time to step back and get some perspective. It has clearly been a tough year. As of the market close on Friday November 25th, the S&P 500 is down 15% from its previous peak at the start of the year. The Nasdaq and the Russell 2000 are down 29% and 23% respectively. The Vanguard Total Bond Index (BND) is also down 15% for the year. Bonds did not help your portfolio this year. The S&P hit its low of the year (drawdown) on October 12th - down 25%. Also in mid-October, the Nasdaq reached its low (drawdown) of -34.8%. Since mid-October the S&P and the Russell 2000 have made a nice climb while the Nasdaq has not increased at the same pace.
2022 Data through November 25th
| S&P 500 | Nasdaq | Russell 2000 |
Price change % | -15.3% | -28.9% | -23.2% |
Drawdown % (low) | -25.0% | -34.8% | -32.2% |
Here is a comparison of the three indices in 2022. The patterns are very similar, but the S&P 500 has fared much better than the Nasdaq or the Russell 2000. In the graph, you can see how the Nasdaq has lagged the other indices in the last month. The market continues to punish technology stocks this year.
Throughout 2022, we have been comparing this bear market with the bear market of the 1970’s. The graphs line up well as you can see below, and the seventies were the last period where we experienced high rates of inflation. The 1970’s market was only halfway through its decline at this point and continued falling for another year. It bottomed out with a price drop of 44%. You can also see from the chart below that markets don't usually drop in a straight line. In both bear markets (1973 and 2022), the markets have what are termed "bear market bounces." There are short attempts at a rebound where prices increase by 10% or even 15% only to be followed by another move downward.
Let’s look at another view of the S&P this year to see what the technical analysts are looking at. Analysts see a succession of lower highs and lower lows throughout the year which is typically bearish. The top diagonal line in the graph below is called a resistance line and the bottom diagonal line is called the support line. As of 11/27 the S&P is approaching the resistance line. If the price breaks through that line it would be a bullish sign for the chartists. But they would be more optimistic if the S&P climbed back to and broke through the mid-August high of down 10% or roughly 4,300 for the S&P. If the index reverses and turns down from here, we would still be stuck in the downtrend.
We are now just about eleven months from the pre-crash peak for the S&P and about thirteen months from the peaks of the Nasdaq and the Russell 2000. The average length of a bear market decline is eleven months, so it is possible that we are in the late stages of this crash. But we just saw that the 1970’s bear market decline lasted two years.
The reality is that no one knows if the worst is over or not. The direction of inflation and the economy and corporate profits will likely dictate when we begin the inevitable rebound. Because of the uncertainty, it is important to follow a disciplined approach to stock market investing. Our BB&H system is down 5.3% for the year and is fully invested at present because of the recent rise in the markets. We are positioned to benefit if the market keeps moving higher and we have automated orders placed to limit losses if the market turns down from here. Stay disciplined, my friends.
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
Bonds lower your long term investment returns
SUMMARY:
Bonds are supposed to lower risk in your portfolio. Bonds are supposed to be a "safe" asset. Bonds are supposed to provide a cushion during bear markets like the one we are now experiencing in 2022. All of this sounds comforting. But, what does the data show? Do bonds really help our portfolios? How much cushion do they provide?
Bonds or fixed income assets are supposed to provide a predictable return and a measure of safety. The main reason to be in “safe” assets (cash, money market funds, bonds, etc.) is due to the risk of losing money in other asset classes like stocks and commodities.
Since the stock market always has a risk of losing value in the short term, you are advised to keep a portion of your long-term investments in bonds or fixed income products. One problem with that approach is that bonds can and do lose money. In 2022, bonds are down roughly 15% due to the increase in interest rates. When interest rates rise, the value of bonds go down.
There are various approaches to determine how much of your long-term investments should be in bonds or fixed income. The standard “rule of thumb” people like to use is 60/40 where 60% of your investments would be in the stock market and 40% of your money would be in bonds or fixed income securities. Financial advisors will also tell you that the percentage split should vary based on your age. For example, if you are 35 years old, they would advise you to allocate a higher percentage of your assets to stocks and a smaller percentage of money to bonds because you are 30 years away from retirement and, therefore, have more time to wait for a stock market recovery after a bear market crash. And, conversely, if you are older and would likely be spending some of your investments sooner, you would be advised to keep a smaller percentage of your assets in stocks. Rather than a percentage allocation to cash and fixed income assets, the best way to determine the split is the timeline of when you would need access to the money. That is a topic for another day. For today’s example, we will be using the standard 60/40 split between stocks and bonds.
Bond Returns vs. Stock Returns
Let’s compare the historical returns of the stock market with the returns of the bond market. For the stock market, we will be using the return data for the S&P 500, and we are including annual dividends. For the bond market, we will use 10-Year Treasury securities, and we are including price changes in addition to interest payments. Here is the data for the last 50 years – from 1972 through 2021.
| 50 Year Avg. Return | Current Return |
S&P 500 (with dividends) | 10.50% | 9.10% |
10 Yr. Treas. (with price chgs.) | 7.20% | 4.30% |
60/40 Portfolio | 9.20% | 7.20% |
So, over a 50-year timeframe, you would have earned 3.3% more each year (10.5 vs. 7.2) if you had all your money invested in the stock market vs. all of your money invested in the bond market. A 60/40 split between stocks and bonds would have lowered your returns by 1.3% per year (10.5 vs. 9.2). What seems like a small difference (1.3% per year) makes a huge difference in your investments over a 50-year period. An all-stock portfolio with a beginning value of $100,000 would grow to $14.7 million over a 50-year period with an annual return of 10.5%. This is a great example of the power of compounding. A 60/40 portfolio with the same starting value would grow to $8.2 million with a return of 9.2%. You would have 80% more dollars or $6.5 million. That is a lot of money.
When we look at current returns for stocks and bonds, the results are even more significant. Stock returns are now lower than the 50-year average because dividend payouts are much lower than they were 40 years ago. And current 10-year treasury notes pay about 4.3% in annual interest. The 50-year average for bond rates above were higher because they included the high inflation and high interest rate environments of the 1970’s and 1980’s where bond payouts often exceeded 10% per year. Using current rates of return, the 60/40 portfolio would cost you 1.9% per year compared to an all stock portfolio (9.1% vs. 7.2%).
If the 60/40 portfolio provides much more safety and security during market crashes, it might be worth the lower returns. But how much safety and security does a 60/40 portfolio provide?
Let’s look at the major bear markets of the last 50 years.
The 60/40 Portfolio in Bear Markets
The 60/40 portfolio does provide some cushion during bear markets, but just over 1% per year on average. We are looking at the complete bear market cycle here which represents the time from the prior price peak to the end of the bear market when price recovers to the prior peak. So, the only returns from stocks would be annual dividends. Bond yields are measured based on both annual interest plus any changes in price of the bonds. So bonds, do help a little bit in bear markets but only by about 1% per year. In the current bear market of 2022, bonds are not providing any benefit.
| Annual Return | Annual Return | Annual Return | 60/40 vs. |
S&P 500 | 10 Yr. Treas. | 60/40 Portfolio | All Stocks | |
2007 - 2013 | 2.1% | 5.2% | 3.3% | 1.2% |
2000 - 2007 | 1.6% | 6.2% | 3.4% | 1.8% |
1973 - 1980 | 4.6% | 6.5% | 5.4% | 0.8% |
Average | 2.8% | 6.0% | 4.0% | 1.3% |
The 60/40 Portfolio in Bull Markets
Not surprisingly, the 60/40 portfolio weighs down investment returns during bull markets. Again, we are including price appreciation plus dividends in the stock market returns. Bond yields are measured based on both annual interest plus any changes in price of the bonds. A 60/40 portfolio costs you almost 4% per year in returns compared to a portfolio of 100% stocks. Notice how high stock returns are during these decade long bull markets – over 17% per year. And notice how high bond returns were in the 1980’s and 1990’s as yields were much higher and bond prices appreciated due to a steady decline in interest rates.
| Annual Return | Annual Return | Annual Return | 60/40 vs. |
S&P 500 | 10 Yr. Treas. | 60/40 Portfolio | All Stocks | |
2012 - 2021 | 17.0% | 2.0% | 11.0% | -6.0% |
1990's | 17.9% | 8.2% | 14.0% | -3.9% |
1980's | 16.7% | 13.1% | 15.3% | -1.4% |
Average | 17.2% | 7.8% | 13.5% | -3.8% |
If you need access to your investments in the next few years, you should not be investing that money in the stock market. Those funds would not qualify as long-term investments. For money that you do not plan on accessing for 5 or 10 or 20 years or more, your investment returns will be higher in a 100% stock portfolio vs. a 60/40 stock and bond portfolio. But I am sure many of you are concerned about your peace of mind and the comfort of owning bonds. The problem is that bonds provide only an illusion of safety as the previous analysis shows. In 2022, long-term bonds have decreased about 20% in value or just about the same as the stock market. The point is that fixed income investments are not the best way to protect your portfolio from stock market collapses. The financial professionals will tell you so, but it just isn’t true. There is a small benefit (1% per year) to the 60/40 portfolio in bear markets but a bigger cost (4% per year) during bull markets. It is simply not a good solution to the problem of bear markets. Our Beyond Buy & Hold system is a direct and better solution to the problem. You can participate fully and aggressively in bull markets and sidestep bear market collapses without the cost and the illusion of safety of bonds.
Be well,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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