As the entire world locks down in reaction to the ongoing coronavirus pandemic, our number one concern as a group is mutual solidarity in saving lives. But the ultimate impact of the tiny COVID-19 virus extends so far beyond the immediate health toll. The disruption to our global economy required to prevent its spread is having profound, deep-scarring effects on the everyday lives we take for granted. Entire industries are closing their doors, countless people are losing their jobs, and any short-term treatment for the disease may simply be a prelude to a much longer financial road to recovery.
So as we shelter in place taking care of our families and waiting for the worst to pass, it’s natural to count not only our stock of food in the pantry but also our collection of stocks in the market. No matter how you invest, I wager it isn’t pretty. It’s not just you. There’s no hiding from the turmoil, and we’re all feeling the pain.
The resulting anxiety prompts normally self-confident investors to suddenly get very curious about how others are doing in the same situation. I get it. So let’s talk real numbers and put the current financial crisis in perspective for different types of portfolios.
Unless you’ve been living under a financial rock, you’ve probably heard about the recent stock market turmoil. You know what I’m talking about. That big unexpected thing that nobody saw coming spooked the market into a freefall. The news is full of gloom and doom. The usual safe-haven assets aren’t behaving as you might expect. Normally level-headed people are freaking about about their investments. And you’re sitting there wondering if the financial world really is finally coming to an end.
Even without naming the crisis, I imagine this situation sounds familiar. In fact, despite the false sense of invincibility that blissfully ignorant investors can easily build up during periods of market growth, this kind of thing happens all the time. Portfolio Charts is dedicated to studying that history beyond the pretty long-term averages. From the meager short-term drawdowns to the wildest pandemonium when stocks are truly off their meds, the data is all here in its raw visual glory.
But contrary to the media personalities that live for selling juicy drama, pious lectures, and petty schadenfreude, my goal isn’t to peddle in fear. I’ve been there and understand your concerns, and I simply want to share the knowledge and philosophy that helped me overcome my own investing insecurities.
So on this day where you may be questioning your own decisions and anxious for what the future holds, allow me to offer a little wisdom learned the hard way. Think of this short list of articles as my bear market survival kit, as they are a small window into the mindset and approach that helped me gain the confidence I needed to make money, sleep well, and live a happy life in any market condition.
Sometimes the simplest investing concepts we take for granted are actually a lot more complicated than we think. For example, reasonable people might rationally assume that two small cap value index funds should have identical returns since they theoretically follow the same asset. But it doesn’t really work that way because definitions matter. What does “small cap” mean? Who defines “value”? Read the fine print and two similar funds may be a lot more unique than you realize.
I’ve been thinking about that subtle complexity recently, as in the process of finalizing the most recent annual Portfolio Charts data update I refined the definition of “small cap” to better match common index fund methodologies. The tweak was simple enough, but succinctly explaining what it means and why it matters got more and more difficult the longer I thought about it. The entire process made me realize it might be a good time to have a longer discussion on how stock index fund definitions work.
So if you’ve ever looked at an assortment of large, mid, small, blend, value, and growth stocks and wondered what all of that actually means, this article is for you. It’s going to get a little technical, but if you stick with it you’ll learn something not only about how indices are constructed but also how to use that info to interpret the data you find both here and elsewhere.
Happy New Year!
The rolling of one year to another is an annual ritual full of champagne, fireworks, and overall good times. But far beyond the resolutions that may or may not last, January 1st is a particularly important date for me as it means there’s another year of data to collect, process, and study. And make no mistake, this is no ordinary year. With 2019 now in the books, Portfolio Charts can finally lay claim to a full 50 years of portfolio history!
I figure a landmark that big deserves something special to mark the occasion, so I’m excited to roll out something I’ve been working on for a very long time. Data depth is nice, but the thing that really sets Portfolio Charts apart is the breadth of asset options and the number of home countries covered. So in addition to adding that 50th year of history, I think it’s time to share my latest creation and truly open the numerical floodgates.
What if I told you I’m doubling the number of home countries, adding new assets like European stocks and a bunch of new bond options, and completely reworking every tool to unlock countless additional portfolio possibilities?
Interested? Of course you are! So let’s start 2020 with a bang.
It has been a terrific year both for me personally and also for Portfolio Charts, and I hope you feel as blessed as I do. I’ve been frantically working behind the scenes for the last several weeks preparing for some exciting new features for the New Year, so in lieu of a lengthy new post I thought I might celebrate the holiday season by sharing a few of the most popular Portfolio Charts articles from the past year.
If you’re new to the site and are interested in a quick rundown of what it’s all about, look no further! And if you’re a veteran reader looking for a good article to share with friends and family to help them think about investing from a new perspective, I’ve got your back. Without further ado, here are the top-5 most popular articles of the year by pageviews sorted in chronological order.
An interesting recent trend I’ve noticed in portfolio discussions is a renewed debate about the resilience of factor premiums versus the good old cap-weighted stock market. It’s entirely predictable that a tough stretch for any investment has a way of bringing out both the nervous supporters on one side and the proud haters on the other. But I really can’t fault the pros for keeping an eye on performance of some of the trendier factors or the investing laypeople for wondering what everyone is even talking about.
What do I think? It’s complicated. So let’s talk about factor investing.
I’ve flown a lot over the years, and I understand first-hand how all of the little details like packing, efficiently getting through security, and getting settled on the plane become so routine for frequent travelers that they can do them without even thinking. But occasionally life throws you a curveball, just as it did on a recent flight where I was without my normal headphones. Stuck for several hours with nothing but the drone of the engines to keep me company, I can’t say I was thrilled but it turns out it was just the inspiration I needed to explain a complicated concept:
How do consistent portfolios full of volatile assets actually work?
Sure, I could go into a detailed discussion of covariance, standard deviations, and the complicated math behind efficient portfolio construction, but frankly I know I would quickly lose most people and even bore myself in the process. So inspired by the the desire for silence I normally take for granted, let’s step back and think of the problem a little differently in terms we can all relate to — noise.
I wouldn’t exactly call myself a minimalist, but I’ve definitely come to appreciate the measurable mental, physical, and financial benefits of not having to deal with so much stuff. And as you might imagine, I’m also a big fan of data when more is almost always better. So when those two worlds collide interesting things are bound to happen.
Something must be in the financial water lately, as even the most bullish investors have started publicly expressing worry about the stock market finally reaching an unsustainable climax after more than a decade of record growth. With increased stock volatility, inverted yield curves, and global trade worries all making news, the economic tension is palpable to the point that the dreaded R-word is starting to get some significant buzz.
Are we headed for a recession?
Recessions get people worked up for a variety of reasons. For example, the events of 2008 decimated the stock market, cost scores of people their jobs, forced many leveraged buyers out of their homes, and nearly upended the entire financial system in the process. While there are many factors that contributed to that turmoil beyond the recession that came with it, it’s true that recessions tend to coincide with a lot of negative financial events. So it’s understandable that anyone who lived through the situation might be worried about a repeat and walking on eggshells given current market sentiment.
I’m not going to pretend that I have all of the answers for every problem associated with recessions, nor am I going to claim I have any idea when the next recession will start. But as a long-time student of portfolio history I’m in a pretty decent position to bring something to the table when it comes to how to structure your investments to weather the inevitable storm. So rather than just peddle in the typical doom and panic, let’s study something productive.
Which portfolios performed the best in recessions, and what can we learn from them?
When discussing historical investing data one of the more interesting points that inevitably arises is the question of just how applicable past results are to current events and future investing decisions. Some people reject all historical data as completely irrelevant because the future will never look exactly like the past, while others hold up mathematical evidence-based investing as some sort of scientific principle that one would be foolish to question. I imagine one might expect me to fall into the latter camp, but frankly I think it’s more complicated than that. Good data speaks for itself but unless you’re speaking the same language you can easily get the message completely wrong.