Too Costly To Hazard A Guess
Market returns have been dismal during the first half of 2022. Just as the horizon seemed darkest, three broad U.S. stock indexes surged to end July 2022 with their best returns in two years. 1
Markets often surge surprisingly, just when we’re most convinced they never will. When you guess wrong, missing out on even a few of the market’s best days each year can have a significant impact on cumulative returns.
Missing JUST A FEW DAYS CAN HURT PERFORMANCE
Performance of U.S. stocks (as represented by the S&P 500 Index), 1990–2020
So, why the dramatic turnabout this July, especially as national and global headlines remained relatively bleak?
It’s not whether the news is good or bad, but whether it’s better or worse than what we’ve been collectively bracing for.
As The Wall Street Journal senior columnist James Mackintosh wrote:
“The drumbeat of gloom this year drove down prices, but also meant that even-worse news was required to drive them down more. When everything looks grim, the slightest break in the clouds looks like a new day.”
Expert Forecasters Have Poor Track Records
Of course, even as the financial press announced the strong monthly returns, there have been plenty of pundits pointing out how fleeting any “recovery” might be. After all, most of the same challenges we’ve been facing all year remain alive and unwell, which makes it easy for forecasters to convincingly call for copious doom and gloom ahead.
They may even be correct. But once again, we caution against betting on it either way.
If expert forecasts were useful, we should see evidence that trading on their predictions can improve your end returns. Instead, a recent analysis by Morningstar’s John Rekenthaler reinforces existing data suggesting just the opposite is true.
Trading ahead of expected news, can end up putting your farther behind.
Rekenthaler compared returns across five investment approaches for the 10 years ending December 2021. He found that stock funds that maintained their target exposure across the entire decade did better than those that had the freedom to change exposure in response to new or expected news.
How many times have you been stuck in traffic and switched to a faster lane only to come to a standstill? Doing this adds anxiety and increases the risk of an accident and you may or may not have improved your situation.
Picking the fastest lane is a stressful guessing game. Likewise, trying to anticipate the movement of the market adds anxiety and undue risk.
What's worse, funds that alter their allocation also had a nasty habit of disappearing entirely. We wonder if this prevented the worst returns from even showing up in the results (even though real people lost real money in them). Survivorship rates among static funds were between 66%–74%, whereas the other funds only survived about 53% of the time.
Rekenthaler also looked at whether investors could have done well by identifying the few “winning” funds ahead of time. He demonstrated that the funds’ relative rankings were so random from one year to the next, that there was no way to do that. If anything, past outperformance suggested slightly worse returns moving forward.
Stranger Things
So, are we predicting a happily-ever-after for 2022? Hardly. Then again, you never know; stranger things have happened.
If you've entrusted us to be involved in your finances, we're available to review your personalized numbers in the context of these perpetual uncertainties. You can find your personalized results anytime at www.openwindowFS.com/plan and you can connect with us at (775) 827-0670 and www.openwindowFS.com/connect.
If we're not yet working together, let us know how can help you manage an investment portfolio ideally structured to sustain you, your family, and your wealth through the perpetual uncertainty that lies ahead.
Footnotes
1 - Three broad U.S. stock indexes ended July 2022 with their best returns since 2020—up 9.1%, 6.7%, and a hefty 12% for the S&P 500, the DJIA, and the Nasdaq Composite, respectively.
MISSING JUST A FEW DAYS CAN HURT PERFORMANCE
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
In US dollars. For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero.
S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. “One-Month US T- Bills” is the IA SBBI US 30 Day TBill TR USD, provided by Ibbotson Associates via Morningstar Direct. Data is calculated off rounded daily index values.