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?
Growth is a wonderful thing. We all start somewhere and do the best we can, and over the years people learn, mature, and evolve into something even better. That applies to lots of things like relationships, careers, asset allocations, and even hobbies like this little Portfolio Charts endeavor. So in honor of the 4-year anniversary of the site I’ve decided to launch a new logo and tagline that I think celebrates its growth as a resource and captures its spirit and mission looking forward.
Find a portfolio to love
You see, the pages here may contain a lot of data and visualizations but the design intent goes so much deeper than that. Strip away the methods and focus on the goal, and there’s really one singular mission I have in mind — I want you to be a happy investor! It’s such a simple concept but it’s amazing how difficult it is for so many people to grasp, so let’s forget everything we think we know about investing and start from scratch.
What does it mean to love your portfolio?
If you’ve been paying any attention at all to financial news this week, you’ve probably heard about the large 19% drop that Facebook experienced on Thursday. Facebook is the fourth largest company in the US by market cap — behind only Apple, Microsoft, and Amazon — and the total loss amounts to a staggering $120 billion wiped out. That’s easily the largest single day loss by one company in recent stock market history, and if you’re personally holding a lot of Facebook stock you’re probably not a happy camper.
But let’s say you’re more the index investor type than the individual stock picker. Should you be worried?
With the stock market recently dropping more than 10% in a short amount of time, I’ve noticed a lot of panic in financial circles. Beyond the fairly steep short-term loss there’s also the fear that a much more painful long-term correction may finally be starting, and stock market investors are understandably on edge.
Do you worry that your life savings are about to catch fire and burn to the ground? Setting aside what is causing the drop, whether it portends a major correction, or even whether you should be all that concerned about it in the long run, I’d like to focus for a moment on your very real anxiety and what you can absolutely do about it.
I’m personally not worried in the slightest, and it’s not because I’m some sort of investing robot who never gets upset. It’s because I would not have known that there’s such a major stock correction from looking at my own account balances, as a panic-inducing drop just isn’t there. While comparing relative portfolio performances over just a few weeks is pretty pointless, in this case it’s definitely not a matter of luck but of very deliberate structural portfolio planning. When I invested my money, I took the time to build firewalls.
Investors have a real knack for over-thinking things. There are those who imagine themselves as master traders controlling hundreds of variables at once like rocket scientists or professional sound mixers and squeezing out every last decimal of performance. And of course there are inexperienced types who also imagine investing works like that but who lack the confidence to even start learning. Personally I believe this complexity myth is disruptive to the well-being of both sets of people, and nowhere do I see this more than in the simplest of investing topics — cash.
Perhaps you’ve noticed the tag line for Portfolio Charts:
A Picture Is Worth a Thousand Calculations
While obviously a play on words to a common phrase that figuratively captures the descriptive power of images, some may not be aware that in the context of the site it is actually quite literal. Lots and lots of calculations go into every image, and I thought it might be fun to illustrate just how deep the rabbit hole goes.
Thanksgiving is maybe my favorite holiday of the year. Between family, football, and an insane amount of delicious food, the fourth Thursday of every November is something I always look forward to.
But while the traditions of Thanksgiving are something I hold dear, the traditions of the day that follows are something I’ve never really gotten into. Of course I’m talking about Black Friday, when shoppers get a day off of work to recover from eating too much and line up early in the morning to experience things like this in search of a good deal:
One of the things I’ve found most interesting in the feedback I’ve received with Portfolio Charts is the diversity of people who appreciate it. Whether it’s an investing newbie eager to learn about index investing, a an experienced investor comparing portfolio options, or even an occasional professional fund manager interested in the calculation methodology, it’s exciting to see so many people find value in the clear and unbiased representation of good data.
In an effort to offer a helping hand to the first of those groups, I created a new page to outline the basics of how to use the information on the site to build and manage a portfolio of your own. It’s just a start, and I do plan to expand that type of information over time, but luckily it’s really not that complicated! So if you’re new to investing or know someone else looking take the plunge, that’s a good place to start.
But every good explanation of “How” deserves an equally good explanation of “Why”. This is something we all need to be reminded of occasionally no matter where we are in our individual investing experience.
Discussing investments with others is often a minefield of competing information. Two highly educated people can look at the exact same numbers and come to completely different conclusions about the results. Information from primary sources even as reputable as Vanguard does not necessarily make the situation any better, as the same fund can appear wonderful in one tool but disappointing in another. How on earth can an everyday investor find an appropriate portfolio when even the experts can’t agree on what is good and what is not?
The important takeaway is not that risk and returns are unknowable or that everyone who disagrees with you is bad at math. The problem most often arises from the natural desire of humans to reduce complex problems down to a single straightforward number. The real world is more complex than most people understand, and the assumptions by which they derive that number can greatly affect the results. Whether they realize it or not, most investors — casual and professional alike — cherry pick data every day.
Everyone loves a good cup of coffee. It’s one of the most popular beverages in the world, and if one were to poll a random group of passers-by on the street it’s very likely they’d find a good percentage of people who identify as frequent coffee drinkers. But offer those biggest fans a free cup of home-brewed coffee, and there’s no guarantee they’ll like it. While people often talk about coffee in universal terms, everyone has a specific type and combination of ingredients that they like best and a caramel macchiato with extra foam tastes much different than a strong coffee served black. The devil is in the details.
Stocks are kind of like coffee in that regard. Lots of people love them and sing their praises, but that doesn’t mean that all types of stocks are equally appealing to all people. Walking into a fancy coffee shop with a big menu and just asking for “coffee” may not necessarily yield the results you will like, and walking into your brokerage and announcing “I’d like some stocks, please” might elicit a few funny looks. What types of stocks? The ones you choose may drastically change your portfolio outcome, and lumping them all together as a single homogeneous entity sorta misses the point. In coffee and in stocks, it’s important to be specific.