EVALUATING INVESTMENT RESULTS

To be a successful investor, you must know how to evaluate different investment strategies and the investments you own.

Even many experienced investors overlook important aspects of performance evaluation. You will never know whether you have the right investment strategy unless you properly measure and assess your results.

Absolute vs. Relative Performance

It is critical to track investment results precisely and consistently. Investing is about data and measurement.

At the end of each calendar year, you should record your one-year, three-year, five-year, and ten-year average annual returns.

This gives you your absolute performance.

Absolute performance is important — but relative performance is more important. You don’t know whether your results are good or bad until you compare them to an appropriate benchmark.

For example, earning 10% in a given year may sound strong — but if your strategy should have produced 15%, you underperformed.

Industry Standard Benchmarks

The industry has developed standard benchmarks for virtually every investment category:

• Large-cap U.S. stocks → S&P 500

• Small-cap U.S. stocks → Russell 2000

• International stocks → MSCI EAFE

• Bonds → Benchmarks based on duration and type

However, comparing each investment solely to its category benchmark often leads to poor decisions.

For example, an international stock fund earning 9.6% annually over ten years may appear strong if its benchmark earned 9.5%. But if the S&P 500 earned 15.5% during that same period, you should feel differently.

International stocks have historically produced materially lower long-term returns than the S&P 500 while carrying similar or greater risk.

International stock funds have performed well recently, but a couple strong years do not offset decades of underperformance.

Many professionals argue that bonds should not be compared to the S&P 500 because bonds serve a different purpose — downside protection.

They claim bonds are safer and less volatile. That argument makes sense in theory — until you examine real-world data.

In 2022:

The S&P 500 declined 18.2%.

A leading PIMCO bond fund declined 14.4%.

Is a 4% difference compelling enough to justify earning only 2–3% average annual returns over a decade — when stocks returned many multiples of that?

I believe all passive, traditional, investment strategies should ultimately be evaluated against what long-term equity investing can deliver.

Short-term comparisons between asset classes can be misleading. For example, gold has experienced strong gains recently. That does not justify abandoning a long-term stock strategy.

Long-term results matter most.

The Proper Time Period for Evaluation

Many investors make decisions based on short-term results — three months, six months, or one year. These timeframes are often misleading.

Retirement investing typically spans 20 to 30 years. That is the appropriate horizon for evaluating strategy effectiveness.

The only thing investors need to consider when looking at short-term results is whether an investment behaved as it was supposed to.  Did its performance match its stated goals or strategy?  For example, if you owned a growth stock fund in 2023 it should have performed very well in the last few years.  If it didn’t capitalize on a strong bull market for stocks, something is very wrong with that investment.  A growth stock fund should have generated 20% average annual returns over the last three years.

Absolute investment returns are mostly meaningless in the short-term.  The only thing that you need to look at in the short-term is relative investment performance – how an investment performed against its benchmark. The absolute short-term results don’t tell you anything about the future.  Markets are irrational in the short term.  Markets are rational in the long term.

I often see experienced investors making investment decisions based on one-month or three-month results.  Unless an investment dramatically underperforms against its benchmark in the short-term, investors are making emotional decisions and not rational decisions when they make changes to their investment strategy based on short term results.

Performance Across Market Cycles

You should understand how each investment performs during bull markets, bear markets, recessions, inflationary periods, and sideways markets.

When investing long term, you will experience all economic environments. Nothing should surprise you.

Understanding What You Own

You must know why you own each investment and what drives its returns.

I favor stock investments because long-term stock prices are driven by profits and cash flow growth. Over time, markets reflect business fundamentals.

When you don’t understand your investments, you are gambling and not investing.

Understanding your investments means you know how and why your investment increases or decreases in value.  You need to know what factors drive changes in the price of your investments. 

It is for this reason that I do not own bitcoin.  I understand why so many people are bullish on bitcoin but without an underlying metric that ties back to business value I won’t own bitcoin.  There is no way to determine whether bitcoin is fairly priced or unfairly priced at any point in time. 

I am not saying that bitcoin will drop in price or increase in price.  I am saying that there is no way to measure its value.  If I were to invest in bitcoin, I would be relying on luck.  Relying on luck is speculation. 

When you don’t understand an investment, you have no conviction about an investment.  Using my bitcoin example, if the price of bitcoin dropped 30% from where it is at, I would not know if I should sell or buy more.  When the stock market drops by 30%, I know that buying more is the right thing to do.

Conclusion

To be a superior investor:

• Understand every investment you own

• Measure performance annually and compare to benchmarks

• Focus on five-, ten-, and twenty-year returns

• Evaluate short-term results only relative to expectations and benchmarks

• Demand long-term data before adopting any strategy

Don’t get influenced by stories or themes or prognostications when investing.  If someone is pitching a story that sounds good, always ask for the data.  How did this strategy perform over the last 20 years?  How did it perform in bull markets or bear markets?  How did it perform compared to other investments?

If the person pitching the story can’t answer those questions, move on.

If you want an investment strategy that is all about results and data, you should check out my Growth & Safety investment system.  I know exactly how my strategy would have performed in World War II, the Great Depression, the Stagflation of the 1970s, the Great Recession of 2008 and any other period.  I can tell you and show you exactly how and why it beats the results of the S&P 500 in the long run. 

You can book time on my calendar to learn more by Clicking Here.

Stay Disciplined My Friends,

Phil

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Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.

Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.