6 Questions (and Answers) about Investment Performance

This is the last installment of “Nerdvember” and I wanted it to be as comprehensive and educational as possible.  Today I want to share some not-so-well-known information about beating the stock market.  I know – that sounds super gimmicky – and it is!  The thing is, if you look back at our Nerdvember series this past month, I already shared several great ideas and strategies on when to buy, when to sell, and what to buy when you’re in the market.  So today I’m going to answer some questions on the concept of benchmarks, beating the market, and performance expectations.  It’s a long one that I really think everyone should read, so wait for a time when you don’t have anything going on, kick your feet up, put on a blanket and enjoy!

Please know that you don’t need to have read the prior articles in this series in order to grasp the concepts included in today’s column, but if you missed the other “Nerdvember” articles and want to catch up, here they are:

Part I:  The Good, Bad, and Ugly

Part II:  Bonds, Safety, and Market Crashes

Part III:  How to Look for Strong Investments

Part IV:  Is the Market Topping?

Alright, let’s answer some real-life questions about performance expectations.

Question #1:

“Why is my retirement portfolio underperforming the stock market?”


This is a two-part answer.  First off, the vast majority of those who own an investment portfolio have fees associated with their accounts.  Whether those fees have to do with investment management, retirement planning, trading costs, administrative fees in a 401k… whenever your account value is up, it’s going to be up, net-after a certain amount of fees/costs associated with your portfolio.

More importantly, it’s absolutely crucial to understand that there are more investments out there than just stocks, and most people own (or at least have owned) other types of investments this year.

For example, if you have any amount of your portfolio invested in bonds, there’s a good chance your investment returns have been dragged down substantially.  For example, 20-year Treasury Bonds (as defined by the iShares 20+ Year Treasury Bond ETF – TLT) are down -9.09% this year.  This is why we side stepped our model portfolios away from bonds over the summer and put the proceeds in a high-interest-bearing money market instead.

To make matters worse, Commodities (Invesco Commodity Tracking Index – DBC) are down -7.95% this year, International Developed Markets (iShares MSCI EAFE ETF – EFA) are down -10.71%, and International Emerging Markets (iShares MSCI Emerging Markets ETF – EEM) are down -12.88% year-to-date.

So if you owned a diversified portfolio of U.S. Stocks, International Stocks, Bonds, and maybe some commodities, chances are, your portfolio is down – maybe a lot – this year.

Question #2:  “So how do you ‘beat the S&P500’ if all these other asset classes are down?”


Now that’s a great question!  This is one of the big keys in investment management.  Someone decided a long time ago that if you live in the U.S., then the benchmark to beat is the S&P500.  However, if you live in Germany, then you’d be comparing your portfolio to the DAX (the German Stock Market Index).  Of course, portfolio managers in Germany are (hopefully) “beating the market” since Germany’s stock market is down -18.39% so far this year.  All they’d have to do is buy U.S. stocks (not even good U.S. stocks) and they’d be “beating” their German benchmark (index)!

If our goal is to make as much money as possible, all while doing it as safely as possible, we need to do a few things:

  1. Focus on the asset classes that are performing the best: US. Stocks, International Stocks, Bonds, Commodities, Currencies, or Cash
  2. Drill down into the best asset classes and pick the best sectors within each asset class:  Technology, Healthcare, Pharmaceuticals, Energy, Utilities, etc.
  3. From there, if you’re in an aggressive portfolio with individual stocks, we then need to drill down and find the best/strongest stocks within the best sectors.

Makes sense, right?  Well, here in the U.S., if we want to beat our benchmark (the S&P500), but every other asset class is losing money while the U.S. is the only one making money, it’s pretty difficult to outperform, especially in the short-term.

In years when the market is crashing, or when international stocks, commodities, or bonds are outperforming U.S. stocks, “beating the market” becomes a lot more realistic and attainable – kinda like racing a Porsche on a racetrack full of Mitsubishi’s

Question #3:

“If I’m not making as much money as the market, and bonds aren’t doing well, should I be in a more aggressive portfolio model?”


Very few people have all their money invested in stocks.  I love when clients come into my office during market corrections.  Don’t get me wrong, the reason they’re in our office is because they’re nervous and scared.  But it’s better to sit down and discuss what’s concerning you so that the experts can talk you down from the ledge than it is to continue stressing about it.

There are a lot of fulfilling facets in my career, but one of the biggest is having someone walk into my office feeling like the sky is falling, only to walk out of my office feeling so comfortable and confident, they want to move their portfolio from our Balanced model to the Aggressive one (even though they would not have the emotional control to own a portfolio full of individual stocks)!  The point is, they were scared when they walked in – with their balanced portfolio.  Now they’re walking out wanting to take more risk.  That’s what I call educating yourself so that you truly understand what’s going on!

No one calls when the market is going up – but when we have a year like 2018, when we see 2 ½ corrections – people are going to be nervous and they should reach out to us if either:

  1. They don’t have an upcoming financial plan review meeting scheduled, or
  2. They’re not reading any of our articles and getting their peace of mind in other ways.

The last couple who came into our office were truly terrified about the state of the market after October, and they had no idea that we had already started selling investments, going to cash, and positioning our portfolios to take advantage of the market no matter what scenario plays out (if it comes back and shoots higher – or if it decides to head the other direction and the bottom falls out).  Your portfolio should be only as aggressive as your financial plan dictates and no more.  From there, it’s all about managing risk.

Question #4:  “But what if I’m not in a Balanced model?  What if all I own are U.S. stocks – why am I still not beating the market this year?”


Another good question!  Remember the racetrack analogy above?  Well, in years when everything is going down, but the U.S. is “the best of the worst,” we need to have our focus on U.S. stocks and ETFs – but that’s more like racing a Porsche on a racetrack full of other Porsche’s, Ferrari’s, and Maserati’s.  Basically, it’s really, really tough to win.

To be nerdier, when the S&P500 is the best performing index, portfolio managers (such as myself) have our backs up against the wall to buy the best ETFs and stocks, within the U.S. market, that are going to beat the U.S. market over an entire calendar year, net-after-fees.  It’s VERY tough to do when all we can buy are U.S. stocks and ETFs (since everything else is losing money at a much faster clip).

Now, in years like 2003, 2004, 2005, 2006, and 2007, when International stocks and at some points in time, Commodities, were out-performing the U.S. stock market… now we’ve got a great opportunity to “beat the market” since we can take advantage of outperforming investments outside of the U.S. all while taking advantage of the best ones here in our country as well.

So naturally, what we want is for the markets to give us opportunities in other asset classes and investments outside the U.S. Stock market so that we have a better opportunity to “outperform.”  However, if you’ve gotten this far already, maybe you’re starting to see how silly the whole concept of “beating the market” really is.  Do you get to choose what country you’re born in?  What about your religion (okay, maybe when you’re older, but you get my point).

As mentioned above, when we have a year like 2018, when the market goes through 2 ½ corrections in less than 12 months, managing risk becomes a bigger priority than beating the market because putting the pedal to the metal can hurt you a whole lot more than laying off the gas and coasting thru a low visibility storm.

Question #5:

“But I thought Financial Advisory Firms are supposed to beat the market, net-after-fees.  Isn’t that why you’re supposed to hire one.”


The American Enterprise Institute did a study earlier this year and found that, over the 1-year period studied, 51.73% of portfolio managers underperformed the index (just over half).  However, when you observe the studies done over longer time periods, the numbers get worse.  Over 5-years, 86.82% of portfolio managers underperformed and over 15-years, that number rose to 94.29%.

While this is a huge generalization, and doesn’t include all the information you’d really need, the concept of outperformance is basically an enormous misunderstanding.  Over what timeframe do you want to beat the market?  5 years?  1 year?  Six months?  What’s reasonable?  Or is it reasonable to want to beat the market at all?

The data above tells us that outperformance is possible, but:

  1. Those who are able to accomplish outperformance in the short-run typically don’t repeat the next year, and
  2. Over time, it becomes more and more difficult to outperform.

I share an opinion with many others in our industry – that if you’re going to benchmark your financial advisory firm’s performance, it should be done over a full market cycle, which is defined as trough-to-trough or peak-to-peak.  Examples would be 2000 to 2007 (peak-to-peak) or 2002 – 2009 (trough-to-trough).  This cycle is typically equivalent to around 7 years, but this time around it’s lasted a lot longer as we’re currently in the 10th year of this 2nd-longest bull market in history.

Question #6:

“If a financial advisory firm can’t beat the market, then should I just do it myself and manage my own investment portfolio?”


Absolutely, yes!  I’m not one of these professionals who thinks you can’t manage your own investment portfolio.  Anyone can do it if they have at least these three things:

  1. Interest in the subject matter
  2. Time to spend on your portfolio
  3. Unwavering discipline and emotional control

The problem starts if you don’t have interest in the subject matter, you probably won’t spend the time on it, and if you don’t’ spend time on it, you won’t like your results.  Worse yet, even if you do have interest and you do spend the time, but don’t have discipline and can’t keep your emotions in-check (after all, it’s only your life savings!), the outcome can be horrifying.

Dalbar, Inc. does a study and the percentages don’t change much from year-to-year.  But as you can see below, the average equity investor (in stocks, stock ETFs, or stock mutual funds) doesn’t even keep pace with the bond market’s average performance on the far-right.  Why?  Because most people can’t keep their hearts and emotions out of their investment decisions.

Dalbar-Study-2017 6 Questions (and Answers) about Investment Performance

So yes, you can manage your own investment portfolio, and there are some people who enjoy doing it.  In my experience, however, most people would rather trust a professional who watches the markets all day, every day, to be in charge of this all-too-important part of their lives.

The Big Question:

“Okay, fine… if it’s so difficult to beat the market, and if I don’t want to be responsible for managing the success or failure of my family’s life savings, what should I be comparing my portfolio to?”

The Big Answer:

95% of those reading this will “get it.”  Meaning, they wouldn’t even be asking this question at this juncture!  The other 5% never made it to the end of this article because maybe they’re likely married to the idea that, if they’re paying a firm, they just need (for whatever emotional reason) for that firm to beat the market, regardless of the cards being stacked against them.

So what should you compare your portfolio to???

First and foremost, without exception, you should be comparing the performance and future expectations of your portfolio to the average annualized performance of your investments as compared to the minimum rate-of-return (ROR) required to hit every item on your bucket list.  Said more simply, you should make enough money over time to meet or beat the minimum required ROR based on the output of your written, comprehensive retirement plan.

Really, truly – believe me – the most important deciding factor when it comes to the success or failure of your financial plan is the plan.  From there, it’s all about ensuring you have the correct risk profile to match your investment personality and most importantly, the plan itself.

Then, if you really just need to have something to compare your portfolio to, and if you’re in an all-stock portfolio, you can compare your performance to the S&P500, Dow Jones Industrial Average, or the NASDAQ Composite, whichever you like the best.  The Dow only has 30 large-cap stocks, while the S&P500 is comprised of 505 large, mid, and small-sized companies.  The NASDAQ contains more than 3,300 stocks, so a little of everything.

But again, all three of these indices contain nothing but stocks!  So if your portfolio has any sort of target allocation toward bonds or cash/money market (i.e. – non-aggressive model portfolios), then you would need to build a blended benchmark that combines a bond index and a stock index together in a weighted fashion based on the target percentage of each asset class in your portfolio.

In the end, you need to have a written retirement plan in place.  If you don’t have a plan, how do you know if you’ll run out of money or how much risk you should take in stocks, bonds, etc.?  Once your plan is satisfactorily complete, you need to follow it!  A plan that’s not followed is worthless!

The investment portfolio needs to match the goals laid out in the plan – and the plan needs to be monitored and updated at a minimum of once-per-year, or whenever there is a material change in your life (whichever is first).

Lastly, at least at our office, once we have the plan in place, our philosophy is to participate in as much of the upside that the market will give us, all while avoid market crashes (which average drawdowns of -42% over roughly 18 months).

To be specific, that does not mean that, if the market is in a correction that we’re going to avoid the correction of -15%.  That will almost never happen.  Corrections happen too quickly and we’re long-term investors at our office, not day traders.

When the market does crash next time around, and let’s say it’s down -42% (since that’s the average), it also does not mean that we’re only going to be down -5%.  While that sounds amazing (and I’m all for it!), it’s not reasonable or realistic.  Is it possible?  Yes.  Probable?  No.  My goal is to capture no more than -19% (or better) in an Aggressive portfolio in a market that’s down -42% and then aggressively buy as the market starts its next bull market off the bottom of the crash.  That is reasonable and realistic.

So whether you’re a young, successful investor looking to build a massive nest-egg or a retiree trying to protect your nest, the final lessons of Nerdvember are as follows:

  • Don’t isolate your evaluation of an investment portfolio to the bottom line (especially in the short-term)! While it might save time today (because you might not care about the details) you’ll just end up shooting yourself in the foot in the long-run.  Ask, listen, absorb, and understand the big picture.
  • Learn the investment strategy and philosophy being implemented, ask questions, and educate yourself. If you feel like you don’t quite get it, ask more questions.  It’s your
  • Ask your financial adviser to educate you on what will change if the market goes up… or what the investment plan will be when the market crashes. If you don’t know the game plan, you’ll just worry more than you need to.
  • Recall the negative performance of different asset classes this year thus far (from Question #1 above)? So, you already learned today what a “diversified” portfolio looks like if a lot of the diversified assets are getting scorched.  If there isn’t a plan to manage risk in place now, go find one.
  • And speaking of plans… above all, have a written retirement plan in place. If you don’t, you’re just investing and hoping you have enough money… and “hope” is not a plan.

I hope you’ve enjoyed our first ever “Nerdvember” series.  As we get back to simplicity and more broad updates on the state of the market, please send us any and all questions you might have and we’ll answer them in future articles!

Till next time…



Categories: Adam Koos, CFP®, CMT®, CEPA, Educational Articles, Market Commentary

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