Putting your portfolio's performance in perspective

The pandemic not only reshaped our daily lives last year, it created an unprecedented shape to the market, one in which stocks experienced their fastest and steepest bear market decline on record, followed by a historically quick recovery to new highs. Turning the page on the calendar does not change your long-term investment strategy, but a new year does offer an opportunity to reflect on your progress, particularly in a year like 2020 which experienced dramatic market moves. So as you evaluate your investment performance, consider the following:

Things change over time

40 years ago, the Dow included Sears Roebuck & Company, Eastman Kodak and Goodyear Tire and Rubber. Today there’s Boeing, Nike and Apple. Nortel was the largest stock in the TSX two decades ago, now it’s Shopify. Index composition and leadership has changed with the economy over the last century; over time, your portfolio should also evolve along with your personal situation. Adjustments to your goals, time horizon and comfort with risk will influence necessary changes in the composition of your investments. As a result, you should anticipate the fluctuations and potential returns of your portfolio to evolve over time.

Performance isn’t just gains

Maximizing gains is not the sole objective of a sound financial strategy. Building a more balanced investment mix is intended to protect against downside as well, so performance should be evaluated by the combination of return and risk. As the table shows, over the past two cycles, a balanced portfolio trailed during bull markets but experienced significantly less downside in bear markets.

Expectations are important

Seeking higher returns from low risk investments or chasing gains in investments that are riskier than you’re comfortable with can result in disappointment.

Make sure your expectations for your portfolio are:

  1. Relevant (based on your goals, not simply a stock index)
  2. Realistic (appropriate considering your investment mix, time horizon and market environment)
  3. Reviewed (evaluated regularly and measured against progress toward your goals)
Balanced Portfolio vs. Up and Down MarketsStock MarketBalanced Portfolio
Bear Market (Tech Crash '00-'02)-40%-17%
Bull Market (Housing Boom '02-'07)171%77%
Bear Market (Financial Crisis '07-'09)-44%-30%
Bull Market (Post Financial Crisis '09-'20)225%204%
Bear Market (COVID-19 Feb-Mar, 2020)-37%-22%
Entire Period Return ('00-'20)184%198%
Stock market measured by the total return of the S&P/TSX index. Balanced portfolio measured by 65% stocks (S&P/TSX Index) and 35% bonds (Barclays U.S. Aggregate bond index) rebalanced annually. Periods: 3/23/00-10/9/02, 10/9/02-10/9/07, 10/9/07-03/9/09, 3/9/09-12/31/17, 12/31/2017-10/31/2018, 3/23/00- 10/31/2018, 2/19/2020-3/23/2020.

Use an appropriate time frame

Your financial goals are longer-term – you should evaluate your progress toward them with the same perspective. Over the past 45 years, when evaluated monthly, the stock market was positive just 65% of the time. But by evaluating it over 10-year time frames, performance was positive 94% of the time.* In 2020 alone, stocks fell 35% in February and March, then rose more than 50% over the next several months. Considering only the decline or the rally wouldn’t have given the full story for the year. Your performance should be looked at over broader periods of time and measured against the progress toward your goals.

Don’t forget about diversification

Amid the historic pandemic bear market drop last year, bonds posted a small gain, helping limit the downside for diversified portfolios. Diversifying across a broad range of asset classes and sectors can also help your portfolio travel a smoother path than a single index or market. Over the last 10 years, there have been 10 different asset classes in the top two spots for annual performance and nine different asset classes within the bottom two annual performers. Simply put, leadership rotates.

You can’t control the market, but you can control your actions

We think the recovery will continue in 2021, setting the foundation for markets to gain further ground. The path won’t be smooth however, and taking advantage of pullbacks within a broader bull market is, in our view, an effective strategy to help your portfolio’s return over time. We believe the combination of positive economic growth, rising corporate profits and still-low interest rates sets the stage for the bull market to continue this year. To stay on track, we recommend:

  • Proactively rebalancing to ensure your portfolio stays aligned with your objectives
  • Being opportunistic when pullbacks emerge
  • Setting realistic expectations for returns and volatility

As a long-term investor, you generally don’t own the stock market. Instead, you own a portfolio that is personalized to your situation. So your objective is not to match the market, but instead to navigate the twists and turns in the terrain and stay on track toward your destination.

Important Information:

*Source: Morningstar Direct, 1/1/1976 - 2/7/2020. 100% stocks represented by the S&P 500 Total Return Index. Past performance is not a guarantee of what will happen in the future.