Portfolio Roundup: The Fastest Way to Lose Money in 2020

Portfolios, Psychology

The emotional rollercoaster that we all know as 2020 is finally coming to an end, and reflecting on everything that happened I thought it might be interesting to roll up my sleeves and do some serious number crunching. Amid all of the newsworthy events of the past year, the wild financial ride certainly made for an interesting experience for diligent investors. So how did the various portfolios perform over such a volatile financial timeframe? What did the best? What did the worst? And what happened when sterile portfolio theory ran head-first into the brutal COVID-reinforced wall and left bruised investors looking for quick relief from the pain? Let’s jump right in and find out!

Methodology

My goal for this particular analysis is to illustrate the performance for each portfolio throughout the year, so I did a bit of extra legwork to assemble enough daily asset data to model the ups and downs of every portfolio. All asset returns are calculated using Yahoo Finance data for representative ETFs and use the adjusted closing price that also accounts for dividends and stock splits. I assumed each portfolio was perfectly balanced on January 1st, and tracked the compound portfolio growth through December 15th. While 2020 is not yet completely over, I figure it’s close enough to the finish line that we can still get a good feel for the race. I ignored inflation since it’s mostly meaningless on a daily basis, and I also focused on US-based portfolios thanks to the easier data access. But I imagine investors in other countries can still learn quite a bit about differences in asset allocations even through the unique American lens.

How Every Portfolio Fared in 2020

For a simple example to get our feet wet, let’s start by looking at how the Total Stock Market portfolio of 100% US stocks performed this year.

Note that the vertical axis is calibrated to 1 at the opening of the market on January 1st, which means the scale can be interpreted as percentages. That ~35% drop from the peak in February to the valley in March was particularly swift and painful. And perhaps just as unexpected is the soaring upward slope to end the year. Did you believe when the market was collapsing that the stock market would end the year up 19%? Yeah, me neither. That crazy duality is the 2020 stock market in a nutshell.

Every portfolio is different, and by mapping them all to the same chart we can get a pretty good feel for the full spread of outcomes.

While you study that for a moment, allow me to point out a few points of interest:

  • That Total Stock Market (TSM) portfolio not only had the lowest low but also the highest high at the end. That’s generally how stocks work, trading heart-pounding volatility for the hope of higher averages — assuming you can actually stick with it through the rough spots. More on that in a minute.
  • The worst performer of the bunch this year was the Ivy Portfolio, with not only the lowest endpoint but also a pretty painful low as well. But even so, note that it also finished the year slightly up. Even in 2020, every single portfolio finished in the black. Not bad!
  • One thing I find fascinating is that with two exceptions (the TSM portfolio and the dark green line of the Larry Portfolio), the lines don’t really cross much. So for the most part, the portfolios that lost less money in the drop also finished with the higher end portfolio values.
  • Another interesting exercise is to follow the original 1.0 line horizontally and compare how long it took for each portfolio to claw its way back to even after the big drop. Some like the Permanent Portfolio and All Seasons Portfolio managed it in just a few weeks, while others required nearly the full year. That responsiveness in a recovery is something I call “bounciness”, which I talked about in detail earlier in the year when discussing the mechanics of portfolio recoveries.

So adding it all up, every portfolio did pretty well this year considering the circumstances. The distinguishing feature appears to be that the portfolios that minimized the initial drawdown were also able to recover more quickly and finish with the highest account values. In other words, minimizing risk can often make you more money in the long run than maximizing averages once you factor in the cumulative effects of compound returns. Be sure to keep that in mind the next time you’re debating portfolio tradeoffs!

When Theory Meets Reality

While we’re on the subject of risk, however, let’s pause for a moment to reflect on what it really means. It’s way too common for financial analysis like this to just glaze over that term as if volatility, standard deviation, or some other drawdown metric is just some simple value on a spreadsheet to be compared and coldly evaluated. But in the real world it’s so much more than that.

When your life savings are on the line, the experience of risk is something uniquely painful to each individual investor. Picture your retirement plans going up in smoke while everyone around you is also being laid off and you realize you’re probably next. Or explaining to your spouse who is already nervous about investing that a decade’s worth of their 401k savings just evaporated. Imagine telling your son or daughter that you won’t be able to help pay for college this year. Or lying awake at night, staring at shadows on the ceiling, dreading the opening of the market in the morning and wondering if this time really is different and the financial world is collapsing while you sat by and watched it happen without acting soon enough.

Risk is real, raw, and enough to make even the most confident investors question their best-laid plans. Regardless of their untested confidence before they get punched in the face, nobody is immune to the pain.

Capturing that feeling in numbers is challenging, and standard growth charts don’t really describe what we all experience in real time. So let’s shift gears and imagine watching the stock tickers on a daily basis while the markets started to get wild. What would a map of those daily gyrations over time look like in a sudden pandemic? A lot like an earthquake, actually.

Here it’s easy to see the crazy market volatility that accompanied the early COVID shock. Returns swung wildly plus and minus 10% a day after the quake first hit in late February, and it took months for things to calm back down to something resembling the normal we were all accustomed to early in the year. There was even a notable aftershock in June that surely spooked weary investors just as they were starting to get comfortable.

With extreme swings like that, it’s virtually impossible to be a dispassionate investor who blissfully ignores daily portfolio action. And judging from the discussions I saw at the time on message boards I frequent, everyone was evaluating their options. When fear was at its peak, moving to cash to minimize losses was top of mind for lots of people.

Of course, that natural real-world reaction presents an interesting challenge in portfolio comparisons. After all, the data for a buy and hold portfolio is only as useful as the ability of an investor to stick with the plan. So let’s put ourselves in the shoes of a smart, well-informed, and proactive investor who didn’t just sit back and watch the market drama unfold but instead stepped up and took action. How would the same portfolios have done with a bit of tactical defensive trading?

Logical Reactions in Real Time

There are countless ways to slice this problem, but for the purposes of this exercise I tried something relatively simple and realistic that all of us have thought about at some point — sell everything when the financial world feels like it’s falling apart and buy back in once the craziness has passed and the market feels back to normal. The trick in terms of backtesting is picking those dates without the benefit of hindsight, so let’s roll back the clock and talk about a bit of historical context.

Studying the events as they unfolded, it’s clear that March 12th was a watershed moment in the financial downturn. It marks the early part of the craziest market swings where daily losses could no longer be interpreted as mildly painful and started to approach double digits. It’s the first time that the stock market crossed the 20% loss line for the year, a notable psychological threshold where even some dispassionate investors might have hit a pre-planned stop loss trigger. And looking at the news at the time, here’s a sampling of the headlines at the New York Times on that date:

U.S. to Suspend Most Travel From Europe as World Scrambles to Fight Pandemic

Dow Ends 11-Year Bull Market as Coronavirus Defies Economic Remedies

N.B.A. Suspends Season After Player Tests Positive for Coronavirus

Big losses, crazy markets, bleak future — Batten down the hatches! Let’s sell everything on March 12th.

Selling is actually the easy part, though, as deciding when to get back in usually doesn’t have the same obvious signals. So for that decision I went by feel, placing it at Monday, August 3rd. By that time the major aftershocks had subsided, stocks had just crossed back into positive territory for the year, and market volatility had resembled the calm January seas for a full month bringing back a sense of normalcy. And here are a few encouraging headlines from over the weekend leading up to that date:

Despite Historic Plunge, Europe’s Economy Flashes Signs of Recovery

‘Thanks for Flying SpaceX’: NASA Astronauts Safely Splash Down After Journey From Orbit

A Momentous First Night Back for the N.B.A.

Measurable gains, stable market, hope for the future — All clear! Let’s buy back in on August 3rd.

Going back to our daily returns tracker, here’s where I drew those lines. The gray area represents the timeframe where a reasonable investor might have put their portfolio on pause while the worst of the market fear worked itself out. Looking at it through this lens also intuitively makes sense, as it begins with a bit of a delay from when the market first started shaking and lasts until things were consistently back to normal.

In total, that’s about 20 weeks out of the market which is actually a blink of the eye in the grand scheme of things. By moving to cash when things were getting really bad and buying a newly rebalanced portfolio once everything was back to normal, our proactive defensive investor probably felt quite good about how they responsibly handled the situation.

Actions Have Consequences

Sleeping well through the storm is certainly a relief, but there’s always the voice in the back of your head that wonders if you made the right choice. So going back to our first stock market chart, let’s compare the effect of sticking with the original buy and hold portfolio versus surveying the best information available at the time and making our well-reasoned defensive trade. Note that I assumed the cash had a return of exactly zero, which isn’t totally true but is close enough these days.

Hmm. While taking action may have felt like the smart thing to do in the moment, it definitely didn’t work out in our favor. Finishing the year with about 30% less money than you would have owned by doing absolutely nothing is a pretty huge reality check.

But that’s just one particularly volatile portfolio, so let’s look at them all.

If you’re having trouble remembering the difference from the earlier chart, this next image will help you see them side by side. Just drag the slider left and right to flip between the two options.

Surprised? Everything has a tradeoff, and the cost of moving to cash when times got tough is that we also missed the bulk of the recovery that happened before any normal investor was ready to trust the market again. To make it crystal clear how that impacted returns for the year, here’s a chart that maps the final 2020 returns for every portfolio using both strategies.

Every single portfolio performed significantly better when left to its own devices than when “protected” via active means. In fact, the defensive trade lowered final portfolio values by an average of 16%. The biggest loser was the Total Stock Market portfolio that swung from the top of the list all the way down to just above the bottom. And do you remember the weak performance of the Ivy Portfolio we discussed earlier? That worst-case buy and hold portfolio still finished with more money than the best-case portfolio with a defensive trade! And note that this is before any capital gains taxes you may be required to pay for the big portfolio sale, so the final tally once the IRS takes its cut may look even worse than what you see here.

There’s no way around it — taking action in a turbulent market ended up being a poor choice for pretty much everyone.

Lessons Learned

To make sure it doesn’t feel like I cherry-picked one situation to push a predetermined narrative, let me take a moment to step back and offer an honest critique of my own work. The tactical defensive strategy I outlined is just one of many and they all would have posted different results. For example, many defensive investors might prefer to sell individual assets rather than the entire portfolio at once. Some people might have gotten lucky and sold a little earlier or on a day with a big upswing and lost less money than those who sold lower. Others may have been more eager to buy back in earlier and would have captured more of the recovery. Long story short, I totally admit this is over-simplified. But to split hairs misses the larger point — My goal is simply to provide one realistic alternative timeline to help teach an important lesson that it took me years to learn the hard way.

So with all of those caveats, if you take away one thing from this analysis, let it be this:

No matter how you invested, if you had done nothing at all this year except turn off the financial news and let your portfolio do its thing, you’d probably be quite a bit up right now. The fastest way to lose money in 2020 had nothing at all to do with your portfolio choice and everything to do with your own personal actions. While it’s normal to want to do something when adversity strikes, timing markets is incredibly difficult. Maybe it would have worked out great, but I just illustrated a very realistic scenario given all the best available information at the time that showed just how hard it can be. So the next time you’re tempted to make a big change in your portfolio during the next economic crisis, remember this post and think long and hard about your choice.

Remember:

  • Portfolios can recover way more quickly than you think, and if you’re not invested to benefit you’re going to lock in a loss. Often the safest course of action is to simply watch and wait.
  • Individual asset performance really doesn’t matter if you’re well-diversified, so stop stressing about stocks or bonds in isolation and start looking at the portfolio as a whole.
  • And perhaps most importantly, pick an asset allocation you can stick with even in a year like 2020 and you’ll be well-positioned for a profitable future without having to over-think it. Things are looking up!

Merry Christmas, Happy New Year, and may 2021 be the start of something great.


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