If we could choose a near-perfect example of why we harp on staying invested and remaining committed to an investment strategy that’s rooted in academic science, it would be the returns that equities experienced during January 2019. After a terrible 4th Quarter in 2018, most global equity benchmarks roared back from their holiday blues.
Here’s where we stand so far (from 1.1.19 through 2.1.19)1:
| S&P 500 Growth | +7.51% |
| S&P 500 Value | +8.80% |
| S&P Mid-Cap 400 Growth | +9.73% |
| S&P Mid-Cap 400 Value | +12.02% |
| S&P Small-Cap 600 Growth | +8.81% |
| S&P Small-Cap 600 Value | +12.46% |
A keen eye will notice a couple of points with the data above that coincide with our Investment Philosophy and why staying invested was far better than selling out at the end of December. First, Small and Mid-Caps outperformed Large Caps. Second, Value in each market cap outperformed Growth. And while this is great news, it doesn’t mean that we’re now in the clear. In fact, I wouldn’t let any single month of data, either good or bad, persuade you to make any portfolio strategy changes nor would I let it convince you of any strategy other than staying invested.
I highlight the points above merely to show that in any given month, the premiums we target for our clients will either be positive or negative and it’s impossible to predict one way or the other. By staying invested, the goal is to constantly pursue the premiums regardless of our personal outlook. I touched on this topic back in November of 2018 in a newsletter titled “Chasing Premiums;” contact us to be included on future newsletter mailings.
As mentioned above, Value outperformed Growth across market capitalization. Using the Small-Cap results as an example, historically speaking, the amount of outperformance in any given month is expected2 to be 0.27% (statistical mean) . In simpler terms, we should expect to have Small Cap Value outperform Small Cap Growth by 0.27%. Holding all else equal, if Small Cap Growth returns 1.00% for a hypothetical month, we should expect Small Cap Value to return 1.27% in that same month. Make sense?
In January 2019, Small Cap Value outperformed growth by 3.65%, well above the expected 0.27%. How can this be? Let’s travel all the way back to statistics class…you know, the class most people hated! Whenever there’s a mathematical mean or average, there’s also a measurement of results spread around that mean; what we call a standard deviation. Using historical data, the standard deviation of Small Cap Value is 2.82%. This signifies that performance of this premium in any given month has shown to be anywhere from -5.37% to 5.91% calculated as 2 standard deviations from the mean. This represents 95% of the results within a normal distribution.
To take this one step further and bring us back full circle as to why we care about this data and why staying invested is preferred to not, think about the following question for a minute. If we expect the premium of Small Cap Value in a given month to be positive (0.27% is a positive number) what percent of observations over the last, say, 10 years, were not? The answer: 4.53% of the observations were negative. Let’s ask the same question for other time periods:
| Any given month: | 42.68% negative. |
| 1 Year: | 29.59% negative. |
| 3 Years: | 18.00% negative. |
| 5 Years: | 11.68% negative. |
| 10 Years: | 4.53% negative. |
| 20 Years: | 0.82% negative. |
| 30 Years: | 0.17% negative. |
Notice a trend? The longer you pursue the premiums by staying invested, the greater your chance of realizing positive premium results.
I’ll reiterate the following point: do not let a single month of data, or even six single months of data, change your outlook and, thus, investment strategy nor let it cause you to do anything other than staying invested. Your investment strategy should be based on your time horizon, financial goals, and tolerance for volatility (risk) and should change only when one of those change. We help guide, manage, and make minor adjustments along the way for our clients and we’d love to help you and your family too. Get in touch today to begin your journey.
Image Credit: MCLB Albany – navigating by use of compass and data – not by gut feelings and emotion.
- https://www.ftportfolios.com/Commentary/MarketCommentary/2019/2/4/week-of-february-4th
- I italicize the word “expect” on purpose – we expect these results because of past statistically significant observations, they are not guaranteed results. Very little is guaranteed in the investor world.
- French, K. (2018) Volatility Lessons: What do past returns say about future performance. Tuck School of Business, Dartmouth College.