We are often asked by clients, “How am I doing?”

Performance is always relative, so the answer in many cases depends on how we measure. Benchmarks can help frame the conversation. Examples might be the S&P 500 for U.S. stocks, the MSCI EAFE (Europe, Australasia, and the Far East) for international stocks, or the Bloomberg U.S. Aggregate Bond Index for investment grade bonds.

While we certainly want to understand short-term performance, we prefer to focus on the long-term.

Why? Even the best managers struggle to consistently outperform their benchmarks in the short term.

Here’s a mini case study, looking at large cap and small cap U.S. stock funds. I searched Morningstar’s database for the following:

• Morningstar category is either large blend or small blend (isolating funds that focus on U.S. large cap stocks or U.S. small cap stocks)

• Only include funds whose returns were in the top 10% of their category over the past decade

• Remove index funds (their goal is to mimic the benchmark, not beat it)

• Funds whose longest-serving portfolio manager had been there for at least a decade

• Finally, I removed all duplicate share classes and just kept the one with the lowest expense ratio

Remember, these funds are among the best in their groups, having outperformed 90% of their category peers over the last decade. Also, keep in mind that my search isn’t perfect. Some of these funds may have been in a different Morningstar category 10 years ago or tweaked their strategy. Still, looking at the data might provide some helpful context.

How did these managers fare against their benchmarks each quarter? What about each year?

Look at the chart below.

The dark green bar shows all 3-month periods during the past decade. In investing, three-month windows are considered very short term. The funds that met the criteria listed above were barely better than a coin flip during these periods, outperforming their fund’s benchmark 54% of the time. That point is worth repeating. The BEST managers in these categories only beat their benchmarks 54% of the time over three-month windows! Compare that to the brown bar, representing the 7-year periods. These same managers were much more successful in outperforming their benchmarks when given the benefit of time.

My point is hopefully obvious. Focus on the long-term. There will inevitably be periods, especially short-term periods, where performance doesn’t feel great. That’s part of investing.

The beginning of 2023 is a great example of how short-term returns can differ based on the market you’re observing. Through April 30:

• The S&P 500 is up 9%.

• What about the Dow Jones Industrial Average? It’s only up 3.5%.

• And the tech-heavy NASDAQ 100? That index is up a whopping 21%.

• How about small cap stocks? The Russell 2000 is barely positive at 0.9%.

Understanding what pieces of the investment portfolio have been boosting or dragging down returns can provide helpful context to the “How am I doing?” questions we all ask from time to time.

One final thought. Successful long-term investing should be as much about managing risk as it is return.

As investors, we must accept certain risks. We want to be intentional about these risks, doing our best to ensure they align well with our long-term plans. A regular review of both risk and return can help keep portfolios aimed at achieving the goals that matter most to you.

Interested in talking more? Email me at eric@divviwealth.com or set up time with the Divvi team to continue the conversations.

Divvi Wealth Management (DWM) is a State registered investment adviser. Information presented is for educational purposes only intended for a broad audience. The information does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. DWM has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment, or client experience. DWM has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the adviser’s ADV Part 2A for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. DWM has presented information in a fair and balanced manner. 

DWM is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed. 

DWM may discuss and display, charts, graphs and formulas which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions. Consultation with a licensed financial professional is strongly suggested. 

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions, and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.