Think You are Underperforming This Year? Not a Chance!


    Think You are Underperforming This Year? Not a Chance!

    The Dow and S&P 500 are on a tear this year, so who could blame you for ripping open this performance report and being disappointed to learn that your performance is nowhere near as high as you imagined. Your next thought is likely to be, “Something is very wrong and needs fixing.”

    The truth is nothing is wrong at all. The only thing missing is the proper perspective. Americans have been conditioned to think about the Dow Jones Industrial Average and S&P 500 Index whenever we think about stocks and stock markets, as if those are the only two indices that count. We also tend to measure market performance in three month or annual increments, and when ours doesn’t measure up, we tend to go into “fix it” mode; figure out where the problem is and address it.

    That kind of thinking, while completely understandable, can unfortunately decimate the long-term growth of your wealth.

    Check out the graph below.  If you look at this year’s performance of your global balanced equities vs. the S&P 500 (in the “call out” circle located in the upper middle of the graph), you can see that the S&P 500 is beating global balanced equities so far in 2018. You can also see that the 2018 performance is only a tiny portion of the almost 50 years of performance history on that graph.

    If you were only focusing on 2018, you’d have every cause for concern. However, step back and look at the performance of these same two indices going back almost 50 years and you can see that a dollar invested in a global balanced equity portfolio would have grown to $496 through the end of 2017, versus $135 in the S&P 500.

    What’s more, if you took every measurement period since 1970 (in other words, every 1-year, 2-year, 3-year….all the way up to the full 48 year period) the global balanced equity portfolio has beaten the S&P 500 during 85% of those periods.

    Each of us has a fundamental choice to make.  We can either:

    • Hitch our wagon to the S&P 500. Base our evaluations of our relative investment success or failure on the short-term performance of the S&P 500. History shows by doing this we’d have made the correct decision 15% of the time since 1970, and we also would have dramatically underperformed the global balanced equity strategy below–$100,000 invested in 1970 would have grown to $13.5 million in the S&P 500 versus $49.6 million in the global balanced equity portfolio.
    • Go with what has actually worked. Base our decisions on almost 50 years of evidence and go with the global balanced equity strategy. If you are going to take the risks associated with being invested in stocks (and everyone needs to be in stocks to some degree in order to have any hope of enjoying long-term financial success), why settle for the dramatically lower returns the S&P 500 has delivered long-term?

    Making this switch in your thinking can be pretty challenging because it requires you to think individually and be willing to take the road less traveled, in comparison to the rest of the crowd. You have to be willing to tolerate periods of what appears to be underperformance compared to the S&P. Over a couple of decades it is very infrequent, but when it does happen, it tends to run in pockets.  Imagine one or two dime-sized holes in a single slice of Swiss cheese and you get the picture.

    We are in one of these periods this year. International and emerging markets stocks have really been underperforming the S&P 500 so far this year, primarily because of the uncertainty created overseas by President Trump’s tariffs.  To date, new trade agreements have been reached with Canada, Mexico and South Korea.  If we are able to reach one with China, we can expect the cloud hanging over international markets to lift considerably.

    It’s also helpful to remember that last year was the polar opposite of this year. Our international and emerging markets funds had 2017 returns ranging between 7-13% higher than the S&P 500.

    While we are strongly advocating you remain globally diversified, we also recognize that not everyone will want to do that. If you would prefer to have a more US-centric portfolio, please set up a meeting or a call with us. Our job is to guide you while meeting your needs as an investor, and we’d love to chat with you about it.