You’re the worst

I had a great conversation with some clients last week about our investment strategy. Some of the discussion centered around why I recommend the mostly passive, long-term, low-cost strategy that I do, and why we don’t do some other things that might work too. I think that a low-cost passive strategy is most people’s best route to investment success. But I’m not naive enough to think it’s the only way one can allocate assets or behave in the market and be successful.

The trouble is, it hasn’t been an easy year to be a broadly diversified, low-cost investor. Returns aren’t great. International stocks have underperformed US once again. Emerging markets still stink. (So far) a somewhat conservative bond position has been outpaced by a long bond bet. For many, this has resulted in returns flirting with 0%. Not awesome.

And so, our temptation is to look around a bit. We wonder if we did something wrong, if we missed something. We hear that someone with a different strategy just killed it this year and we kick ourselves a little. That could have been us. We’re as smart as that guy (smarter, really. Come on. That guy?). Why didn’t we get the returns he did this year?

It’s easy to get caught up in what strategy was the best this year or last year. But how often do we pay attention to what was the worst?

I thought I would take a look at some popular strategies and see how they did on an annual basis. The test covers value investing (represented by everyone’s favorite Warren Buffett and Berkshire’s annual market returns), trendfollowing (Barclay’s CTA Index), John Bogle’s 60% S&P 500, 40% Aggregate Bond, and a factor-tilted global balanced portfolio.

(Trendfollowing in Yellow, Berkshire Hathaway in Blue, Bogle’s 60/40 in Green, Global balanced with factor tilts in Red.)

My point here isn’t to look at what was the best over any time period. These are very different strategies with different reasonable time horizons and different risk profiles. My point is that there’s a reasonable chance your strategy, whatever it is, will be at the bottom some times. It’s worth pointing out that the two balanced portfolios, unsurprisingly, have fewer appearances at the top or the bottom over time. Unsurprisingly, 2015 is looking like a fairly miserable year for a global balanced portfolio, as large cap US stocks have beaten most every other stock and bond asset.

Your strategy is not going to work unless you work with it. I have beaten this dead horse well into the ground, but if you keep looking at your neighbor’s returns, you’re committing investor suicide. Somebody, somewhere did better than you this year. Lots of somebodies. Anyone who works for Facebook or Amazon or Netflix and has a bunch of their net worth in company stock probably crushed you this year. Is that a strategy you should pursue? Probably not, but you need to remind yourself why you have the strategy you do. Everything has a bad year. Value stocks get cheaper. Trendfollowers get whipsawed. S&P 500 investors get caught in tech bubbles. “Factors” don’t show up.

You will either get this or you won’t. If you think you are entitled to the best return of the best strategy every year, good luck to you. You will bounce from strategy to strategy, constantly disappointed with your returns. You will chase performance and fail to capture the long term return of ANY strategy, let alone the “best” strategy. You’ll fire dozens of financial advisors and complain to your friends about what schmucks these clowns are. You’ll say the markets are rigged. For you, they are and always will be.

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