How to Evaluate your Portfolio’s Performance | AWM Insights #161
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Episode Summary
Taking the time to review your portfolio’s performance is a great exercise, but it’s important to use the right tools and methodology to carry out an accurate evaluation.
It’s also critical to remember that everyone is playing a different game with different starting and ending points. This fact makes the standard returns you see online or on TV relatively important, but not the absolute target.
As our portfolios are custom-made to fit each client’s priorities, no singular benchmark or data point can give you complete context on how you’re performing or doing. The most meaningful metric will always be how likely you are to accomplish your goals and priorities.
Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (714) 504-7689 to join our new AWM Insights Network.
Episode Highlights:
0:00 Intro
0:25 How should you start thinking about your portfolio’s performance?
2:32 One index is not enough to measure your portfolio’s relative performance
3:30 Why a custom portfolio approach needs a different method of performance evaluation
5:19 What indexes do we use to compare ourselves and how do we think about the results?
7:25 Why being a long-term investor is a rewarding rollercoaster
10:13 Text us!
+ Read the Transcript
Brandon Averill (00:02): All right everyone. Well, we're back for another AWM Insights and it's going to be a good one today because we're talking about performance. So we're going to get into all the returns. No, just kidding.
(00:13): But we are going to talk about the question that we get often and that is, how is the portfolio doing? I think hopefully what we're going to go through today is a little bit of context around, from our perspective, how you should think about your portfolio, how you know if you're on track, what should you really be measuring yourself against? I think when we often hear these types of things, we almost always default to the S&P 500. So I think that the financial talking heads, you watch any media everybody talks to, we're guilty of it. We even talk about it a little bit and we're going to today.
(00:48): But at the end of the day, we really want to give you guys some context for when we're thinking about your portfolios and we're trying to evaluate, are things going the way that they should be going, how we think through that and how we think you should think through that. So I'd love to maybe just lay out some context. Justin, if you don't mind, just talk a little bit about how we think about benchmarks. Are we thinking about the S&P 500 when we're looking at things? Are we looking at more international benchmarks? Are we looking at broadly diversified benchmarks? Are we even looking at benchmarks at all? I'd love to get your thoughts.
Justin Dyer (01:25): Short answer is yes. We are most definitely looking at benchmarks and we look at them at a number of different layers, if you will. I think the most important layer, which is also kind of the most, I don't know, nebulous and... I don't want to say undefined because it is defined for each and every client, is whether or not you're reaching your priorities or progressing towards your priorities or still able to meet your priorities. At the end of the day, you all know, clients, listeners, we view money as a tool to be used in a way that can allow you to reach your priorities, whatever they may be.
(02:01): And then the sub point there is in the highest level of confidence, the highest likelihood way in which you can invest your money and to support those priorities. So that's number one. Again, that's a little undefined if you will, or, okay, well how do we compare to what the market is doing overall? And those are all completely valid questions, but it is important to really hone in on, "Hey, that that's really what matters." Now, when we go below that, it is looking at what the market is doing, but we can't just simply isolate the S&P 500. That's a phenomenal proxy for just broad, large company performance in the US markets. It's not a great proxy if you're a diversified investor, whether that be diversified across US and international markets, or diversified across stocks versus bonds as well.
(02:55): So the short answer, again, to kind of put a bow on my point is we most definitely look at benchmarks, but we look at a number of different benchmarks depending on the question we're really trying to answer, starting with, "Hey, are you meeting your priorities? Are you continuing to progress toward your priorities?" That being the most important benchmark that we isolate.
Brandon Averill (03:17): Yeah, I think that's important. For clients that are listening, you guys have probably heard us talk about this with you guys till we're blue in the face, but because we individualize all of your portfolios to who you are and those priorities that you're trying to achieve, that is really where we're trying to measure things and then it is breaking it into the components from there. And so I think when we start to look at this diversified portfolio, we're going to break it down and say, "Okay, we want to still make sure that we're investing, let's say, the growth part of your portfolio in the most effective way over the long term."
(03:52): What that means is that there's oftentimes, because you're taking a diversified approach, you're not going to get the return of the highest performing asset class in that year. And that's not a bad thing. That is, by definition, exactly what we're trying to do because of what you just hit on, is that we want to do this with the highest amount of certainty over periods of time, but allowing ourselves to say, okay, well for client A, maybe we want the more stable protective asset side to be 30% of the portfolio or 33% of the portfolio, and the balance be on the growth side and client B, it might be 15% and it could be 85% on the growth side. So it's really kind of trying to separate those two things and then you start to get beneath the layers.
(04:42): And so talk about the growth side a little bit, and so many people do talk about the S&P 500 and for clients, you've probably already know this because we talk about it a lot, but the S&P 500 only represents the largest 500 companies in the United States. What we know is that from evidence, it actually supports a better performing allocation over longer periods of time. And so we take a more diversified approach, but also implement a strategy that kind of anchors you a little bit more to smaller companies, value companies, profitable companies. And if we're comparing the S&P 500 to that, we're looking at apples and oranges, right?
Justin Dyer (05:22): Yeah. Again, they're okay metrics to compare to one another, but it's not sufficient. Really, when we're looking at comparison or benchmarks on the growth side, to your point, there's a benchmark that we typically look at called the Russell 3000, which is the 3000 largest companies in the US markets. And I'm focused specifically on the US markets. There are similar versions both in international developed and the emerging markets where we're trying to compare to a best fit index. The S&P 500, to your point, is really not the best fit index to a broad-based, diversified public equity strategy. We're not even talking about private markets here, and there's separate ways in which we benchmark and compare performance at that specific asset class or that specific level. But we do. We want the broadest, most accurate representation to compare ourselves. Even at that point when we're looking at the Russell 3000, it doesn't necessarily represent the value-small, profitable companies that we tend to favor on the public equity side, the public market side of things.
(06:28): And so within that, we even have to say, "Okay, well do we outperform? Do we underperform that specific benchmark?" And if we did, that's okay. Really the answer to ask is, why? Was that expected ahead of time? And if the answer to that is, yeah, it was expected ahead of time, we outperformed because value profitability companies did well or we underperformed because value-small, profitable companies did poorly, then that makes sense. It's within expectations, it's within reason. The portfolio did what it was supposed to do based on what we had set out ahead of time. You can't look at a benchmark and then react, you alluded to what you're going to do in that case is constantly be chasing performance, which we all know is a terrible practice to really implement.
Brandon Averill (07:16): And I think that's a really interesting point to maybe round all this up on is timeframes also really matter. We're getting towards the end of the year, middle of the year, so everybody's looking towards the end of the year and saying, "What's going to happen? What's the crystal ball?" And we all know this, over a short period of time, who the heck knows what's going to happen? But kind of going back to what do we expect, you can go back to some of the historical probabilities and start to gain some comfort or at least start to understand why you want to continue to participate. So we're sitting in the S&P 500, we'll use it, is up a little over probably... It's double digits. Over 14% per year, probably about this time. And so you start to look back and you're like, "Okay, well based upon this, more likely than not, we're going to end up pretty well for the year."That's what things typically point to.
(08:10): But I always find it good to go back and think through, okay, why does all this matter? Why are we staying invested? It's because we have no idea over the next six months, but we start to gain confidence and certainty over a longer period of time. And I thought some of the stats, just to remind clients listening, and you've guys have heard this, but our expectations are that the growth side of your portfolio may go down, let's call it once every four years. That's something we would expect to happen. That's why you get rewarded with the growth over time.
(08:43): But on the flip side of that, history's also told us that more than 30% of the time, the S&P is actually up more than 35% per year. So we want to make sure that we're allocated in a way that we also get to take advantage of that period of time and not potentially be trying to guess when the negative's coming and potentially miss when that big positive's coming. And so when we do that right, that allows our portfolios to grow in a way that we expect them to grow over time, allows you to achieve your priorities at a high level of confidence. And the last thing I'll throw out is just this isn't a smooth line.
Justin Dyer (09:20): No, no.
Brandon Averill (09:21): It's not a, "Hey, let's look at a year and this is going to happen," or we can really figure out a smooth path in any one year. The average drawdown every year is also about 16%. So even in those years that you're getting 35% overall, there's probably a pretty good chance that there was a period during that year where your portfolio actually declined by double digits. And so I think that's where it's starting to frame back to the benchmark that truly matters. Are you diversified in a very thoughtful way? Are you very individualized? We didn't even hit on after taxes. Everybody listening to this knows that's what we care about.
Justin Dyer (10:03): It's what matters, really.
Brandon Averill (10:04): Yeah, yeah. Your after tax returns, are they producing enough for you to ultimately get to your personalized benchmark, which is achieving your priorities?
Justin Dyer (10:13): Yeah.
Brandon Averill (10:14): So yeah, I think hopefully this gives you a little bit of context today for what we look at. We get way below the hood here, but from a high level, you guys have an individual benchmark. When we look at your individual allocations, we certainly have areas that we're targeting to make sure that your allocations, the actual investments that you're in, are performing in the way that we would expect them to. And we're not afraid to make a change if that's not the case, but that's how we look at your individualized benchmark. Hopefully that's the way you guys are looking at it as well. And we hope this was helpful.
(10:50): By all means, shoot us a text. We'd love to hit on new topics that you guys would love to hear about. That phone number is (714) 504-7689, and we look forward to hearing from you. But until next time, own your wealth, make an impact, and always be a pro.