How does 3 years of 0% returns sound?
I saw a popup ad this week, and it said something like “guess which stock is up 350% this year?!” I chuckled to myself and thought, in the perception of some investors, maybe all of them.
My point: there are too many folks walking around with a distorted perspective on what type of market climate we are in. If your risk tolerance level allowed you to invest heavily in some combination of tech stocks, S&P 500 Index funds and popular “story” stocks with no earnings but a lot of speculators, you have had a nice run the last few years.
3 years, no returns…no problem?
The 3-year marker should not really be a big deal. After all, any 3-year return is just a snapshot in time. Especially in the midst of 2020’s stock market, you could slide the 3-year calendar one way or the other, and you might get a completely different angle on investment performance.
But 3-year numbers ARE a big deal. They are a key marketing period in the investment industry. 5-year and 10-year returns are too. However, 3-years is, for some, enough time to look at an investment they made and say, “OK, not just a fluke, its a failure.” And, like on the Shark Tank TV show, they are more like to follow that up with, “for that reason, I’m out.”
That time when diversification lost
However, if you emphasize “diversification” in the traditional sense of that word, you have not had much to show for 2018, 2019 and 2020. As this chart shows, Since late January, 2018, the following investment styles have produced little or no positive return, including dividends:
- U.S. Small Cap Stocks
- U.S. Mid Cap Stocks
- U.S. Large Cap Value Stocks
- International-Developed Markets Stocks
- Emerging Market Stocks
In other words, if you diversify, as many do, based on the classic Morningstar Style Box, you have a bit of red and grey in many of the boxes. So-called “Growth” stocks have done well, though even those styles have been dominated by a relatively small number of companies. As for the rest of the global equity market: not so much.
Growth stocks: past is prologue?
This may or may not be news to you. I have written about it several times, starting with calling the market climate “Stormy” back in January of 2018. Since that time, the S&P 500 has endured a couple of 15-20% dips, and a 33% crash, but still come out comfortably ahead of these styles. It’s up about 28% over this time.
What’s the point of telling and showing you all of this data? It is not so much what has happened already. It is that a major marking period is approaching. And, that might influence how everything from investors, the media, and 401(k) participants react.
You see, we are just about 100 days from the full 3-year anniversary of the start of the period shown in that chart (January 26, 2018). That means that if the markets are flat or down between now and late January, there will be a lot of investment funds and portfolios that will show 3-year returns of 0%, or negative returns.
What to do about this?
I think serious investors should consider how they can take advantage of this situation. First, at least on a relative basis, these other equity styles may offer some long-term appeal. Of course, we could have said that a few years ago. The underperformance of everything to Growth stocks is not just a 3-year issue. It’s been happening for a while.
However, I think this tells us that traditional diversification methods leave something to be desired. After all, the markets work differently now. It is likely late in the Growth stock super-cycle. But that is not the same thing as saying that Value stocks, smaller stocks and non-U.S. stocks will simply make up for lost time.
I see this environment as one where preservation of capital is first, and tactical portfolio management is second. That is, it is a good time to seek out opportunities in narrower segments of the equity market.
Rotating among sectors and industries has offered potential for decent gains over shorter time periods. Think weeks and months, not years. I think that will continue to be the case.
If you build it…
And, if you can develop a consistent process for identifying them, renting them, and not overstaying your welcome, you have a tactical weapon to deploy in a wide variety of market climates.
It has been a crazy 3 years, minus about 100 days, for investors. And in many corners of the global stock market, it has not been a profitable one. And they call that a bull market, do they?
Go beyond the headlines, and focus on your own priorities as an investor. I think that’s a better approach than finding out, to your surprise, that your financial advisor hung a “goose egg” on your portfolio scoreboard for 3 years.