This afternoon I found myself thinking about this previous post I wrote:
In it, I shamelessly used my wonderful kids to exploit your emotions and review just how simple investing felt at the time. Markets were up across the board, volatility was down and everyone seemed happy. Just about 18 months ago, you’d have been hard-pressed to find someone with a valid complaint about their portfolio. US stocks were up, international stocks were up (more, in fact, than US stocks year-to-date and over 12 months ending 6/30/17). Sure, bonds were off a little bit but who cares when stock returns are solidly up double digits? Nobody.
Fast forward to 2018. Even before we got some real market volatility in October, the natives were getting restless. What was going on? Every diversified investor had reason to be disappointed. Suddenly, cracks seemed to appear. Sure, the S&P was still crushing it (up 10%+ year to date through 9/30/18), so why wasn’t MY portfolio doing the same? What broke? Well, I’ll tell you. For starters, the diversified investor doesn’t own the the S&P 500 and only the S&P 500. A thoughtful diversified investor probably has some exposure to international stocks or real estate or bonds or emerging markets. How’d that work out? In a 12-month period when large cap US stocks are up 17%, nothing else can hold a candle. Bonds were slightly negative, and international developed markets, emerging markets and real estate ranged from -3% to +2%. Suddenly, the easy going investor had reason to distress.
Now, there are all kinds of problems here. The biggest is that there are exactly zero defensible reasons for a diversified investor to be using the S&P 500 as a proxy for investment performance. The S&P 500 isn’t “the market” and neither is the Dow Jones Industrial Average. In fact, it’s pretty hard to define what “the market” is. So when you hear that “the market” was up or down or sideways or crashing or skyrocketing, what you should really hear is “some subset of the investable universe, defined by a random committee or group.”
So that’s our first hurdle when the going started to get tough. The easy inclination as an investor is to pick the best performing asset class and wonder why your portfolio can’t deliver those returns. This is really, really easy when the best performing asset class is the one constantly talked about in the press – large cap US stocks. So as investors, we start to question why we own this portfolio – the same one that we were oh-so-happy with just 18 months ago.
Then October reminded us what markets are really capable of. As I write this, the S&P 500 lost 6.9% in the month. International markets fell as well, down nearly 8% (through 10/31). Bonds were even down, about 1/2 a percent on the month. Yuck.
Where am I going with this? Investing is still hard. It can be hard when some investors are getting huge returns and you aren’t. It can be hard when you feel your determination wavering, when you feel like an idiot for adopting whatever strategy you’ve adopted. And then it can be hard all over again when your portfolio falls in value. Pretty much any reasonably diversified balanced portfolio probably lost in the neighborhood of 5% this month. While reading that on paper doesn’t sound like much (and you’re right, it isn’t), it sure does feel like a lot in the moment. That 5% likely wiped out any gains from a diversified portfolio for the year. Just like that, your disappointingly modest year-to-date returns from September are now ugly, negative returns. No fun.
Here’s the thing: this isn’t supposed to be fun. And no one promised that it would be easy either. If you’re paying attention, it’s not fun or easy. It’s uncomfortable and unpleasant and does terrible things to our brains that are so poorly evolved for investing in imaginary things called corporation in this imaginary economy that we’ve created out of thin air. Ultimately investing is an act of faith – in markets, in people’s desire to make their lives better through hard work and reinvention and innovation, in the rule of law and the rules of markets, not to mention faith in your particular investment strategy when it seems like the stupidest one you could have chosen. And this is why we need tools when that faith wavers. Tools like Investment Policy Statements and guidelines for how to act when our faith is weakest. Without those tools, rules and guidelines, we’re left with only sheer willpower, a limited resource at the best of times.
I promised in the earlier-referenced piece that it wouldn’t always be easy, and here we are. It’s hard. It might be hard for a while, I truly have no idea. But admitting that it’s hard, and that we need tools to get through the hard part, is step one.
Bason Asset Management 