As an engineer by training, I’ve always been comfortable with the use of historical numbers in decision making. From empirically tested yield strengths that inform design specifications to segmented sales numbers that inspire new product ideas, making wise choices is all about putting good data to productive use. And as one can see by perusing the deep data focus of Portfolio Charts, I naturally apply that same mindset to investing.
So one of the things I admit I’ve had to adjust to over the years is something that I never really experienced in my engineering career. When it comes to finance, some people are just really dismissive of historical data.
It’s common in some circles for people to quickly shut down any discussion of past returns as the foolish discussion of unrepeatable events. Some reflexively point to specific timeframes that surely skewed the numbers in deceptive ways. Others explain how current events are very different than the past and proclaim that the old results are ancient history. And a surprising number have developed an outright distrust of math and statistics as the tools of unsophisticated investors and financial snake oil salesmen.
To be fair, these opinions are often born of legitimate examples of data abuse. Lots of people misuse statistics all the time or naively apply them out of context, and I totally understand how backtesting gets a bad name. But in my experience, the problem is not with backtesting but with backtesters. It’s super valuable when done correctly, but you have to know what you’re doing and approach it in the right way.
So to cut through the financial cynicism, I’d like to share three short stories about real-world situations where the use of historical data is widely accepted. By exploring how data is used well, perhaps we can learn a thing or two about how to also apply it effectively it in our personal portfolio decisions.
A loved one passed away recently, leaving the rest of the family scrambling to deal with all of the things nobody is ever truly prepared for — funerals, estates, and caring for other family members affected by the loss. Everyone gets their turn eventually, but you’re never truly ready. It just happens, and you’re thrown in the deep end to sink or swim.
This particular family member had a lot of pets, and one of the responsibilities that fell on my brother and me was the job of rounding them up and taking them to a local adoption center to help them find new homes. Dealing with cute cuddly animals surely was more joyful than coping with the hard realities of death, so we happily took the job. Arriving at the home with a sense of purpose, we opened the door expecting a gaggle of furry creatures excited to be held and fed.
The dogs were naturally suspicious at first, but once the food came out they softened up and were as sweet as can be. A few belly rubs and a short ride later, and they were well cared for and ready for adoption.
And then there were the cats.
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 first wrote this post three years ago, but it’s one I personally think of often. With all of the stress, struggles, highs, and lows that have been unavoidable facts of life in 2020, I feel compelled to share an old but refreshing perspective that feels appropriate in the moment. Think of it as familiar comfort food for tired financial minds.
Happy Thanksgiving! My sincere hope is that you have much to be thankful for.
Between spooky Halloween decorations, the predictable election anxiety, and a touch of understandable Covid fatigue, is seems fear is on the minds of investors these days. I’ve noticed a distinct uptick in nervous takes from stressed investors worried about everything from low interest rates to high valuations. While families with enough savings and job security to weather the lockdown storm are doing pretty well in the grand scheme of things, the thing about fear is that it’s flexible.
No matter who you are or how confident you feel, I can guarantee you have a pain point tucked away that scares the living daylights out of you. Maybe it’s spiders, heights, or rejection. Or yes, financial loss that delays your retirement or destroys your life goals. Nobody is immune. And many people seem to be sharing concerns that stocks and bonds are about to fall apart and drag their life savings into the dark financial abyss.
But make no mistake — those fears are often quite legitimate! The doomsday analysts may be completely right about the prospects for different assets. Markets shift all the time, and the question is not if but when stocks and bonds give up the ghost. So knowing that the grim financial reaper may be right around the next corner, there are at least three different options for tackling the dreaded unknown.
I’m a big fan of asset allocation. Rather than slaving over daily market news to chase fleeting profits and avoid unpredictable losses, smart investors can create an intelligently constructed portfolio that grows and protects their hard-earned money with low stress and minimum effort. Like following a simple recipe to bake a cake from scratch, all you have to do is purchase a handful of low-cost ingredients, combine them in the right proportions, and let chemistry, heat, and time do all the work. Simple but sophisticated portfolio ideas designed by some of the best minds in the business can help you meet your important life goals while freeing you to focus your own energy on the things in life that truly matter. And with just a small amount of coaching, anyone can do it!
What’s not to like?
Well, to be honest there is one thing that has always sorta rubbed me the wrong way. It’s not a problem with the strategy itself, but an inherent communication issue dripping in bias that I believe subtly chases off a lot of people new to the concept. Asset allocation has a marketing problem, and it all comes down to terminology.
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.
In July of this year NASA is planning to launch the next mission in their ongoing series of journeys to Mars. Named Perseverance, the robotic explorer is built on the successful design of the Curiosity rover that has been wandering the Red Planet since 2012. A machine capable of long-term exploration of another planet is a true engineering marvel, but controlling it remotely is not even the hard part. After decades of practice, even the requirements of launching devices out of the pull of Earth’s gravity are pretty well-known. But do you know what is still a real challenge even for the best rocket scientists?
Sticking the landing.
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.