Keeping Things in Perspective…

How has my portfolio performed? Seems like a simple question that would have a straightforward answer. In reality though, it can be answered in a multitude of ways. One answer could be in absolute returns that simply measures how many more (or less) dollars you have in your portfolio over a given period of time. Another answer could be relative to some benchmark like the S&P 500 Index, a broad measure of the overall stock market. Maybe your portfolio outperformed the S&P 500 by 3% – but that doesn’t necessarily mean that you made money – you could just have lost less.

Another wrinkle to portfolio performance / returns is the time horizon. Most metrics are calculated on an annual calendar year basis. Often investors refer to how their portfolio has done year-to-date or what was my performance last year? There is no rhyme or reason to these start and end dates – they are just what investors have become accustomed to over the years. No one really asks, “How has my portfolio performed over the last 3 months?” in the middle of January which would cover performance over two partial calendar years. In fact, adjusting the starting point can have a big impact on the calculation.

A prime example of this is taking place right now. On January 5, 2018 the S&P 500 traded between 2,731.33 and 2,743.15. As I write this today on June 3, 2019, the S&P 500 is trading at 2,738.43. So, over 17 months, the market has essentially gone nowhere with a whole lot of volatility. At a point last year, the market (as measured by the S&P 500) was up over 10% – only to end the year down -4.38%. From September 21, 2018 to Christmas Eve, the market lost over 20%! At one point this Spring, the market was up 18.25%. These sound like big numbers in both directions – and yet we are still where we were 17 months ago…

If your portfolio started with $100 and lost 20%, you would now have $80. To get your portfolio back to $100 means you need to gain 25%. If your $100 portfolio only lost 10% because you were more conservatively positioned, you would have $90. To get back to $100 you would only have to gain 11%. This illustrates the fact that you don’t have to capture all the market’s upside if you don’t capture all the market’s downside. One can end up with the same $100 with much less volatility.

Many investors are seeing 2019 year-to-date performance figures that are leaving them with a sense of calm, seeing that their portfolios are up double digits. If you are up as much as the market so far this year, it is highly likely that you captured most, if not all of the market’s return during the 4th quarter of 2018. It is highly probable that a hypothetical “$100 portfolio” is just now getting back to even – 9 months later. Too often, investors focus on keeping pace with or “beating the market” and fail to look at the volatility that is associated with those returns.

At the end of April, the market was up 18.25% for 2019. At the end of May, the market was only up 10.74% for the year. That means that over the span of 30 calendar days, the market lost 41% of its returns for the year. And in the fourth quarter of 2018, it lost almost 150% of its returns over the last three months of the year. This illustrates the impact that the time period chosen when calculating performance returns has a huge impact.

We went through a prolonged period of very low volatility in the market and investors became accustomed to opening their monthly statements and seeing higher portfolio values. These recent bouts of volatility should serve as a reminder for the kind of damage that quick, sharp declines can have on a portfolio despite enticing year-to-date performance figures. If you are capturing all the market’s upside, you are likely capturing all of its downside and the question to ask yourself is – are you OK with that?

Best Regards,

Robert Barnes


Disclosure: This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information is for educational purposes only. Index returns are for illustrative purposes only and do not represent actual fund or investment performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.   Source: Yahoo Finance, CNBC and WSJ (June 2019)