Now that we’ve had a few weeks to recover from the holidays and start planning for the new year to come, it seems like an appropriate time to revisit the events that made 2022 such a uniquely memorable year in the investing world. It ended up one of the worst years on record and I imagine most people are ready to move on. But before we all pick ourselves up and start anew after the carnage, I think it’s important to put what we all experienced into proper historical context.
Sometimes the hardest lessons are the most educational.
How did each portfolio option fare in a truly tough time to invest? How does this past year compare to other bad years that came before? And what can we learn to affect our path forward?
I’ve got the data for all of the 2022 portfolio rankings. So let’s find out.
Now that June has come to an end, economists are busy tabulating various indicators as usual to close the quarter. And while the numbers are not yet final, early reports indicate that the US experienced its second consecutive quarter of negative growth. Those uninitiated in technical jargon may simply shrug their shoulders, look around, and give a hearty “no crap” to the suggestion that the economy is floundering. But it’s a fairly big deal in economic circles, as that meets the classic definition of the big R-word.
Welcome to the recession.
As stocks swoon, rates rise, inflation takes off, and recession takes hold, clearly it has been a challenging year for investors. So while economists are doing their thing looking at the big picture, I thought it would be educational to run my own numbers on investing choices more within our personal control.
Would you like to know how your favorite portfolio compared against all of the others in the first half of 2022? Let’s dive in and explore what it took to do relatively well in particularly tough investing timeframe.
As we patiently wait for updated market data for the new year, it seems like an appropriate time to talk about “the market.” That simple term is tossed around daily in financial circles, but the true meaning is so often misunderstood that it can unfortunately perpetuate a warped viewpoint of asset allocation that leads well-intentioned people down a measurably risky path. So what is the market? And how might educated investors formulate a portfolio that tracks a true global benchmark rather than a small subset of fleetingly popular securities? The answers to those questions can be found in a straightforward but deceptively tricky to pin down asset allocation called the Global Market Portfolio.
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!
I don’t know about you, but the last few months have been some of the wildest and most newsworthy I can remember. From a global pandemic and ongoing social unrest on one end to an incredibly inspiring SpaceX launch and emerging hope for a better world on the other, the roller-coaster of emotions has been all over the map. It’s unpredictable, intense, and at times utterly exhausting.
And the markets have clearly mirrored that crazy ride. It seems like only yesterday that I was writing an article cataloging one of the single worst months to invest on record, but the market has since roared back far faster than even the most optimistic investors expected. That encouraging development seems to have changed investing mindsets a bit, spurring a curious reader to pose an interesting forward-looking question:
What are the portfolios that tend to do better after a crisis?
While I don’t have a functioning crystal ball, I do have a ton of historical data at my fingertips. So let’s dig in and see what we can learn about portfolio recoveries.
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.
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?
As I blindly swung my arm to swat at the tedious drone of the alarm on the night stand, it was pretty much a morning like any other. I labored out of bed, trudged my way through the early routine on autopilot, and set out on my long morning commute down highway 280 towards San Jose. I always found that stretch of road to be an interesting experience in dual realities, as the stunning views of the bay and surreal scene of clouds pouring over the mountaintops were all too often completely hidden by relentless inner thoughts of important job tasks needing immediate attention. Silicon Valley attracts a certain type of always-on engineer and actively feeds their obsessions, and my blossoming career as a successful product designer at a job I loved had long since shaped me into eager, if anxious, submission.
Generating accurate and intuitive charts to help you navigate the professional asset allocation landscape is pretty darned rewarding, and I take a lot of pride in contributing to everyday asset allocation discussions in my own data-driven way. I also spend a lot of time reading those same discussions online, as not only does it help inspire new ideas but it also helps me understand what drives people. Everyone’s motivations are different, and when you put your life savings on the line the stakes are also quite high so people tend to really tell you what they think.
While that variety of strong opinions makes the financial blogosphere particularly difficult to navigate for new investors, I personally find the abundance of different perspectives a fascinating design challenge. That’s because beyond simply crunching numbers like a good engineer, I’m also a designer at heart and love solving complex problems and bringing new ideas to the table. The Golden Butterfly is one such example, but I don’t believe there’s one perfect way to invest and my problem-solving circuits are always scanning for new ideas to help people find an asset allocation that resonates. So in that spirit, today I want to talk about a new portfolio idea that based on all I’ve read I think a lot of people may find helpful.
Yale University recently released their 2017 annual report for the Yale Endowment, and while normally this would pass without much notice they appear to have made a few waves by continuing an ongoing feud with Warren Buffett. In his 2016 investor letter, Buffett criticized how university endowments pursue market-beating returns through active management and suggested they might be better off investing in index funds instead. Of course the CEO of Berkshire Hathaway follows none of that advice himself, but he has consistently said that most investors including his own wife would be better off with a low-fee S&P500 index fund rather than paying expensive active managers so it’s certainly not out of character. In any case, Yale appears to have taken that a little personally and they dedicated an entire section in their annual report to dispute his claim and promote their own success.
To support their belief in active management, Yale provides data that proves their managers have exceeded stock market returns for the past two decades. For example, over the past 20 years they posted an average return of 12.1% versus 7.5% for the total US stock market which gives them confidence to say they “crush the returns produced by US stocks”. Ending with a flourish, they conclude that “not only has the model worked for the past two decades, it will work for decades to come.”
That’s bold. And it caused a bit of a tizzy in the financial blogosphere with several stories on the topic. So are they right?