Angkor Wat, Cambodia. That’s where trees grow on top of 1,000 year old temples. I first went there ten years ago. It’s definitely worth seeing. But if you go to visit, let me offer two tips. Never drink water from a Cambodian tap. If you buy bottled water, examine the seal and the bottom of the bottle. Some of the locals might look for easy money and pour tap water in.
I drank from one of those bottles. It gave me giardia for Christmas. It’s a microscopic parasite that can make you nauseous, bloated and smellier than a sewer. My doctor ordered a colonoscopy. That’s when they put a camera where the sun doesn’t shine. I didn’t like it very much.
The American Cancer Society says that healthy people should have their first colonoscopy at age fifty. If the scan reveals some trouble, get treatment, then test again every 3-5 years.
If you have a diversified portfolio of low-cost index funds, the same rule should apply to your portfolio’s performance. If we applied the rule literally, it would mean waiting until your 50th birthday before checking your portfolio performance. After that, take a peek every 3-5 years.
I know that sounds extreme. But over your investment lifetime, your portfolio will go through good times and bad times. You won’t have control. If you have a job, invest what you can, month after month, year after year. Ignore your portfolio’s performance. Over an investment lifetime, a portfolio of low-cost index funds will beat about 90 percent of actively managed portfolios after fees. That’s all you need to know.
Last week, I received an email from Scott Clarke. He said I could share his story. Scott is a 24-year old recent Masters graduate in Medical Physics. He’s smart and he’s healthy. He hasn’t asked his doctor for a routine rectal screen. But Scott’s still human. He checked his portfolio’s performance just four months after he started to invest. He was 26 years too early.
Scott wrote, “It says in my unrealized gain/loss column that the return for my portfolio is 2.25 percent. That seems low to me.”
Scott was worried. But if you have an eagle eye for numbers, you’ll know this isn’t bad. If Scott’s portfolio continues to grow at its current rate, it will post a 12 month gain of almost 7 percent. But that’s not the point. Scott shouldn’t look at his portfolio’s performance. In 26 years (unless medical technology makes it obsolete) he’ll have a colonoscopy. Scott could check his portfolio’s performance then.
That doesn’t mean Scott shouldn’t rebalance his portfolio. Once a year, he should align it with his goal allocation. If he has 20 percent in bonds and 80 percent in stocks, he should make sure he has the same allocation next year too.
Those who monitor their investment performance too much can get into trouble. If their portfolio doesn’t do well, they might stop adding money. The more foolish among them might even sell. If a different combination of indexes do better, they’ll be tempted to make a switch. Too many people do this. It causes them to buy on highs and sell on lows.
Let’s assume that Scott invested a lump sum in Vanguard’s S&P 500 index on October 31, 2006. The index is the most commonly used proxy for the performance of the largest capitalization U.S. stocks. If he didn’t add money, he would have gained an average annual return of 6.58 percent to October 31, 2016. But according to Morningstar, the average investor in Vanguard’s S&P 500 averaged a compound annual return of just 3.74 percent. There’s only one reason they performed so poorly. At some point, they looked at their progress. Most took action. They bought more when stocks rose. They bought less (or even sold) when their portfolios sank. They shifted asset allocations in the hopes of finding something better.
If you own a portfolio of low-cost index funds, keeping blinders on is better. Year-to-year returns are nothing but distractions. Most of the time, they’re not what we expect.
Between 1926 and 2015, according to the Ibbotson database, the S&P 500 increased by a compound annual return of 10.00 percent, including reinvested dividends. (In case you didn’t know, the S&P 500 didn’t actually contain 500 stocks until 1957. Before that, the index contained fewer stocks but still represented the largest publicly held companies in the U.S. stock market.)
Last week, I posted a question on my blog at andrewhallam.com. Most of my readers are regulars. They know about investing. I asked, “Between 1925 and 2015, how many calendar years saw gains between 8 and 10 percent? I collected more than 400 responses using Surveymonkey.com.
I didn’t know the answer before I looked it up. Most of my readers didn’t either. About 52 percent of those who responded thought the S&P 500 had gained between 8 to 10 percent during 20 or more calendar years. About 28 percent thought stocks had earned between 8 to 10 percent during 51 or more calendar years. More than 4 percent said such gains occurred every single year.
During The Past 90 Years, How Many Times Did The S&P 500 Post Calendar Year Gains Between 8 and 10 Percent?
|During none of those calendar years||12.88%|
|During 5 calendar years||12.88%|
|During 12 calendar years||9.20%|
|During 8 calendar years||12.88%|
|During 20 calendar years||9.20%|
|During 27 calendar years||6.13%|
|During 35 calendar years||8.59%|
|During 51 calendar years||11.66%|
|During 69 calendar years||12.27%|
|Every calendar year||4.29%|
|Souce: Survey from Andrewhallam.com|
Short-term expectations can cause a lot of trouble. The S&P 500 gained an average compound return of 10.00 percent per year between 1926 and 2015. But it didn’t gain 8 to 10 percent during a single calendar year.
Year-to-year results don’t mean a thing. Decade-to-decade returns are also inconsistent. That’s why I don’t look at my performance. I don’t want to tempt myself to do something silly. Perhaps I’ll one day take a peek– after my next intestinal screen.
S&P 500 Annual Returns Including Dividends
|Year||Annual Return||Year||Annual Return|
|Average Annual Compound Return||9.88%|
|Source: Ken Fisher, The Only 3 Questions That Count (1925-2010); Morningstar, (2011-2015)|
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas