The Danger of One Year Performance Numbers

“Investment wisdom begins with the realization that long-term returns are the only ones that matter.” – William Bernstein

Now that 2014 is in the books, I’m starting to see the usual flood of annual performance reviews to show what worked and what didn’t. I’ll save you some time – U.S. large cap stocks and long-term U.S. treasury bonds were the place to be and outperformed just about everything else to some degree.

As you read these pieces you get the sense that the authors are shaming you for not being invested exclusively in only the best performing assets. This myopic view of a single annual period completely misses the point of long-term investing and it’s the reason most people fail when implementing a portfolio strategy.

Assuming you have a legitimate investment plan in place, you should never feel ashamed that your portfolio doesn’t keep up year-in and year-out with the best performing strategies. It’s madness to think that way. It can only lead to stress and future pain from chasing the wrong types of investments.

Everyone preaches risk management right up to the point that annual performance figures are updated. That’s when the insanity of the performance chase and second guessing begins. Every single year long-term investment strategies “die” or “fail to work.” And every single year gullible investors fall into the trap of assuming they’ll be able to pick and choose the best performing asset classes.

The best long-term investment strategies will never be the best performers in any given year. They only show their true colors over much longer periods.

As Rick Ferri once said, “Asset allocation is for patient people.”





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Discussions found on the web
  1. Mark Zoril commented on Jan 05

    Good post. It is easy for investors to be influenced by financial media commentary which implies that recent results indicate something deeper than, well, recent results. Also, many advisers promote this as well – annual tweaking based upon recent changes – as a means of adding value. People feel the need to “do something” and this information just reinforces that instinct.

    • Ben commented on Jan 05

      Great point. Doing something, anything, can make people feel more comfortable than sticking to a well thought out plan. It’s extremely hard to do nothing (which is a decision in its own right) when that’s what your plan calls for.

  2. Rudy commented on Jan 05

    Thanks for posting this sooner rather than later. People need to see this and the more often the better. Personally I grossly underperformed the S&P 500 this year. The reality is my portfolio doesn’t look anything close to the S&P 500 so it’s irrelevant. My portfolio does however look very much like FFFFX, the Fidelity 2040 retirement fund and I beat that fund by a little over 1% after fees. Should I be disappointed that I didn’t make 15%? I don’t think so and neither should anyone else. I actually feel pretty good about it and over the long term I know I’ll do well sticking to a strategy and not jumping in and out. Set a goal. Make a plan to achieve said goal. Execute it. Simple as that and it only took me 12 years to learn it. Lol Thanks for the good work and have a great year.

    • Ben commented on Jan 05

      Thanks. Good points all around. Many investors try to beat “the market” without and understanding of things from a total portfolio level. Using a targetdate fund as a benchmark is actually a pretty decent bogie, as well. It’s the simple alternative.

  3. S. Boone commented on Jan 05

    Over a 40+ year career in the trust & investment business, I spent a lot of time refining my “value added” proposition to clients & prospects – superior performance, strategy, personnel, service, etc. In the end, it finally dawned on me that every financial institution was promising the same advantages with little apparent difference in results. What we were really providing investors was a level of discipline that few individual investors can muster over time – by adopting a long term asset allocation strategy and using low cost investment vehicles, our long term performance was always going to be better than the average individual investor who tends to time markets and chase performance, with little understanding of the costs they are incurring.

    • Ben commented on Jan 05

      Well said. It’s difficult to put a number on discipline year in and year out, but it’s right up there with the most important factors for portfolio performance. Many investors don’t get this and that’s where the education component comes in as well. You have to be able to explain why the discipline matters so much.

      And most investors don’t realize that being average or even slightly above average in terms of market performance puts you in the top 70-80% of your investor peers.

  4. Aidan Sweeney commented on Jan 06

    I think some of the people who jump on the 2014 results are ‘unknowing’ momentum investors. There is an argument for a momentum strategy, but the risk is to people who don’t understand that’s what they’re doing, and why someone should or shouldn’t look for momentum anyway.

  5. Justin Isom commented on Jan 06

    Wow Ben,

    So I’ve followed your posts for a while, and I’m commenting for the first time because this article is spot-on! As a money manager, I want/try to convey this to my clients ALL THE TIME; that is, focusing on market cycle returns and not annual returns. But as an investor/client, it’s hard to do so. The media (yourself not included – lol) does an absolutely incredible job of focusing on annual figures, and it just isn’t fair to the honest investor trying to grow his/her capital. It’s simply misleading. Thanks for shining light on this subject.

    You and I need to link up and do some business together. I love your approach to investing and the markets.

    • Ben commented on Jan 06

      Thanks Justin. It’s very difficult to get clients to understand this line of thinking. It’s why I think client education is so important, but even then it’s very easy for people’s attention to drift to the best performers in any given year.

      Glad you’re following along with the blog. Feel free to reach out any time.

  6. Prudent_Investor commented on Jan 08

    Agree with you. The financial media industry is interested only in new sensation in new pproduct, new “pump” so they do not care by default what will happen wiht invetsment even in 1 year..the only plausible horizon for them is NOW:)- this very shortsighted and smart people should use it for his/her advantage… the easiest way just invest based on value aproach not any mumbo -jumbo stories. Some good value posts you cna find here:

    • Ben commented on Jan 08

      Yup, most people know they shouldn’t be falling for this trap, but it’s so difficult not to get caught up in real-time.

  7. Is the S&P 500 a Good Portfolio Benchmark? commented on Jun 10

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