Q4 performance not as good as it seems…

Successful investing involves remaining balanced when market forces tempt us to make major portfolio decisions at inopportune times. Q4 was an interesting transition period and I think investors need to understand the bigger picture to avoid making any reactionary decisions.

We’ve spoken at length about how the Dow hitting a meaningless 20,000 target should not change your approach. The Dow is a broken index with only 30 stocks without broad sector exposure.


Let’s dive into the Q4 performance. The chart above shows Q4 performance for the major asset classes. As you can see, it’s not nearly as good as the media portrayed it to be. The S&P 500 was up close to 4%, but the bond market fell by an equal amount and international stocks were also negative, due to a rising US dollar.

It’s very possible that a globally diversified portfolio ended the 4th quarter negative.


If we drill down to the sector performance for the US stock market, we can see that the relative strength came mostly due to Financials, Energy and Industrials. Of course these are the same sectors that have under-performed much of the last five years.  The consumer discretionary (Amazon’s), Technology, consumer defensive and health care sectors all under-performed on a relative basis.

I would venture to say that many investors had more exposure to the sectors that under-performed. So the temptation for investors is to now pile into the thing that has gone up the most. So go all in financials for 2017?


But before you go there. Take a look at this annual sector performance chart. Can you see any discernible patterns here?  If anything you can see that oftentimes the best performing sector one year turns out to be the worst performing sector the next. So before you go making a major change because of one quarter’s data, remember that change isn’t likely to yield any significant positive outcome.

This all brings me to the main message. The markets can do crazy things in the short term. But the reason why we invest doesn’t change. We don’t invest for one quarter, or even one year, we invest for long term goals while maintaining a certain level of risk.

Unfortunately there is no strategy that works well in every market environment. A conservative allocation will do well in periods of volatility, and under-perform when the stock market is rising rapidly. An aggressive portfolio will work great when the market rises rapidly, but will be very painful during the inevitable downturns.

A balanced portfolio will mean that you’ll usually hate some part of your portfolio each year. But oftentimes that part of the portfolio that you hated last year, will be your best friend the next, as mean reversion runs its course.

Rather than trying to constantly predict what type of market environment we’ll experience each year. It’s best to accept that just like the seasons change, the markets seasons change too. Periods of declining markets give way to periods of rising markets, which give way to periods where the market moves up and down without making any direction (not always in that order).

Investors should be more concerned about what what typically works over time, rather than what is working right now. The truth is that long term investing should be rather boring.


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