Trying to put into context performance for clients is always challenging. Advisors want to know how they did versus known benchmarks. We call this relative performance. Advisors know the only way to escape losses is to just not invest. Many market timing methods offer another set of challenges too lengthy for discussion in this paper. Clients only care about absolute performance (gains or losses). Well, that is not exactly true. I’ve had many over my 43-year career call me up and say how come we aren’t beating the S & P 500? My answer is always your portfolio isn’t the S & P 500. It has many other components to help avoid significant drawdowns. In the last several years, we had drawdowns upward of 40%. My experience tells me very few can hang on through such volatile regimes. My conclusion here is that they care about relative performance on the upside and absolute performance on the downside. That is the cake and eat it too scenario.
Below is a table that I have been keeping for almost 30 years. It outlines the performance of the assets and portfolios per the header since 1971. T-bills is the average rate for 2022 not the ending rate. By all accounts 2022 was one, if not the worst year for portfolios in over 50 years. The massive rise in rates caused the 10-year treasury to also have its worst performance in the same 50-year timeframe.
The basic portfolio used by many large institutions for managing risk is the 60% stock and 40% bonds mix. While I have issues with this, it is the benchmark across the investment management space. That portfolio was down between 18.00% and 21.00%. This is somewhat asset dependent but again it was either the worst year in 50 or close to it depending on some adjustment for the types of assets. Our portfolios were down between 7% and 14% with most falling in the range of 10% to 11%. Nobody likes that but when you manage the downside the upside will improve your compounded rate of returns.
What about the longer term? Let’s use 5 years since this is a common longer term performance figure. Some can use ten years, but Chasefield has only been around for just over 8 years. In late 2017, we communicated and have continued to communicate that we felt 5-year returns would be low. At the conclusion of 2019, that looked like a dicey forecast. We reiterated our beliefs on low returns because of the valuation expansion in 2019. In fact, that expansion lowered our annualized return forecast of around 4%. This turned out to be accurate as returns on all portfolios were around 2% for all investors across all platforms.
You have to! The give up for not investing over the long haul can be substantial. Our table above demonstrates this illustrating the average return for cash is about 4.5% and portfolios is between 8% and 10%. There can be long difficult stretches. The worst 10-year rolling is around -0.01% (1929-1932) the best 15.70% (1982 -1992) the average just above 7.75%. Jump to 20 years and the worst is above 3% with the average again just north of 7.75%. It pays to stay the course and be patient.
All that being said, staying static when valuations are high is particularly difficult and some long timing models can be productive. Day trading may not be but when there are obvious signals you have to take action. These actions are not so much performance enhancing but risk management to lower drawdowns and give you a better opportunity at improving on those long-term numbers.
Chasefield Capital, Inc
Five Year Returns: January 1, 2018, to December 31, 2022 *
*These are representative returns and may not reflect your actual returns. They could be higher or lower depending on a number of factors.
The views expressed represent the opinion of Chasefield Capital Inc. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Chasefield Capital Inc. believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and the Chasefield Capital Inc.’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations.
The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. All information, views, opinions and estimates are subject to change or correction without notice. Nothing contained herein constitutes financial, legal, tax, or other advice. The appropriateness of an investment or strategy will depend on an investor’s circumstances and objectives. These opinions may not fit to your financial status, risk and return preferences. Investment recommendations may change, and readers are urged to check with their investment advisors before making any investment decisions. Information provided is based on public information, by sources believed to be reliable but we cannot attest to its accuracy. Estimates of future performance are based on assumptions that may not be realized. Past performance is not necessarily indicative of future returns.