How's Your Portfolio?

Ben Stiller’s Meet The Parents was released on October 6, 2000 amid the giant “dotcom” bubble in technology stocks that would soon come crashing down.  Although the movie itself has nothing to do with the stock market, it includes a fantastic back-and-forth that humorously captures the technology euphoria that dominated the financial markets in the late 1990s.  Stiller’s character, Greg, a humble male nurse, is meeting his fiancée’s ex-boyfriend, Kevin, a Wall Street stock broker played by Owen Wilson.  As they stand in the kitchen of Kevin’s Long Island mansion, the two characters discuss Kevin’s recent good fortunes:  

 
 

Kevin: Gosh, things have been going so great, lately.  I got in early on some wireless I.P.O.s, and the stuff just skyrocketed from there.

Greg: Wow.

Kevin: What about you, Greg? What line of work are you in?

Greg: I'm in health care.

Kevin: Yeah, so you know what I'm talking about. There are a lot of Benjamins to be made now with biotech stuff. I don't have to tell you that. How's your portfolio?

Greg: I'd say strong...to quite strong.

Kevin: You gotta strike while the iron's hot. Now's the time.

Over the years, Stiller’s “strong to quite strong” line has made its way into popular culture as a common response to a wide-range of questions in which the respondent lacks confidence giving a strong answer.  How’s the market going to perform this year?  What are the chances you wake up at 5 am tomorrow and run 10 miles?  What do you think the odds are your team makes it to the Super Bowl next February?  The response works best when someone asks about your investment portfolio, but it’s a great line that still maintains relevancy almost two decades after the movie’s release. 

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The question of “how’s your portfolio?” has likely been on the minds of many investors lately as 2018 enters its final month.  The Wall Street Journal welcomed its readers back from the Thanksgiving holiday with a lead story Monday about a record number of asset classes posting negative total returns for the year.  According to Deutsche Bank, 90% of all asset classes tracked by its research group are posting negative returns through mid-November.  If these numbers hold through the end of the year, it will mark the first time since 1920 such a large percent of asset classes finished the year in the red!  The story also notes that 2018 could be the first time in 25 years in which both global stocks and bonds finish the year with negative returns. 

It’s not that 2018 has delivered catastrophic losses to investors – after all, the S&P 500 is down just 2% on the year.  Rather, investors’ frustration is that so many different asset classes are struggling at the same time.  Domestic stocks, foreign stocks, US bonds, international bonds and commodities are all tracking the same downward direction over the past 11 months.  As a result, very few portfolios are showing gains on the year.  Unless you opened the year bullish on Brazilian stocks or Norwegian salmon farmers, chances are good that your portfolio is in the red right now as well. 

So, the answer for most people in 2018 to “how’s your portfolio?”  Not great. 

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Investors obsess and focus too much on short-term performance in any given year.  The stock market isn’t some annual game that starts on January 1st and ends on December 31st.  While it’s important to be aware of average annual returns over longer periods of time (10+ year horizons), fixating on any one particular calendar year is rarely a helpful exercise.  Surely, less-than-stellar years should not cause any drastic changes to long-term investment strategies.

The more important question people should be asking is, “am I still on track to meet my investing goals?”  Smart investors understand that markets are volatile and don’t always deliver positive annual returns each and every year.  They identify a long-term strategy and stay the course.  The Boston Red Sox put together a plan for their 2018 season and won the World Series this past October.  When they lost 3 consecutive games in April, they didn’t panic or overreact.  They were confident in their long-term plan.  Investors with 30- or 40-year time horizons ahead of them should proceed similarly when faced with their own short-term speed bumps.      

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For the most part, investors that construct their portfolios to “win the year” on an annual basis have bad returns and miss the point of investing altogether.  These investors lack proper perspective and often miss the forest for the trees.  What’s a good stock for 2019?  Is now a good time to be in cash?  Will the markets will rebound by the end of the year?  None of these questions can be answered with any degree of confidence and are generally irrelevant to long-term investment success anyways.   

Today’s financial technology is a double-edged sword for investors.  On the one hand, it’s never been easier or more convenient to set up investment accounts and establish a recurring savings program.  Novice investors have access to smart, low-cost investment allocations and aren’t restricted by third-party brokers or account minimums.  On the other hand, real-time access to portfolio performance (readily available on your smartphone) can be dangerous.  In today’s world of short attention spans and instant gratification, 11 months without positive investment returns feels like an eternity.  (Historical note: from 1966 to 1981, the Dow Jones index was essentially flat.  Imagine 15 years of little to no growth in your investments!)

Rather than worry about grinding out a “win” in the markets each year, investors should instead focus on behaviors they can control.  This includes setting goals, managing spending & savings rates, and exercising patience and discipline with their investment allocations.  The investing process is a lot less stressful when approached from this perspective.    

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Two years after Meet The Parents was released, the tech bubble in the stock market officially burst.  I would imagine that Owen Wilson’s character got crushed in the process.  He likely lost his house as well as most of his investment portfolio.  I’m guessing Ben Stiller’s character was a simple buy-and-hold investor, saving money every two weeks into the hospital retirement plan and exercising patience in the process.  I never got around to watching the two sequels to Meet The Parents, but I’m guessing things worked out just fine for Greg.

Turns out a “strong…to quite strong” portfolio isn’t so bad after all. 

Mike Giefer, InvestingMike Giefer