Because most investors diversify across asset classes, they need to evaluate their portfolio’s performance relative to a multi-asset benchmark.
Relative to the appropriate multi-asset benchmark, a good return in 2019 could be as low as 5% or it could require a return above 25%.
Evaluating your performance depends on your investment horizon and your risk preference.
Target date funds provide a good barometer of your success or failure.
Are you happy with your investment performance in 2019? Why? The answer to the question "Is performance good?" requires an answer to another question "Relative to what?" In this article, we provide performance benchmarks tied to your investment horizon and your risk preference. If your horizon is long, traditional wisdom says you can afford to take substantial risk, but you're certainly not obligated to take a lot of risks, so for each of 3 investment horizons, we provide three choices - conservative, moderate, and aggressive risk - using the live results for target date funds (TDFs).
Most investors own a diversified portfolio consisting of several asset classes, so you'd like to know how similar multi-asset portfolios have performed and why you've succeeded or failed relative to your TDF benchmark.
Target date funds make good benchmarks for evaluating your performance because they are well diversified and vary by horizon/age, being more aggressive for young people and more defensive for older people.
There are three choices of TDF benchmarks: conservative, moderate, and aggressive. You can decide which best characterizes your approach.
Here's how TDFs have performed in 2019, and why. We provide a Conservative benchmark that uses the Safe Landing Glide Path (SLGP), a Moderate benchmark that is followed by the TDF Industry, and an Aggressive benchmark that extends the Moderate benchmark. The results are live. The SLGP is used by the SMART target date fund index collective investment trust, and the "Industry" is the S&P Target Date Index, a consensus index.
Evaluating Your Multi-asset Portfolio Investment Performance in 2019
It's was a very good year. You should have earned a double digit return unless you have a short investment horizon and you're a Conservative investor. In the graph below, locate your horizon. Then, choose the return associated with your risk. Is your return above or below this benchmark? To understand why you're winning or losing, see the next section below on Asset Class Performance.
Source: Glidepath Wealth Management
You may have succeeded by earning more than 5% or success could require a return above 25%, depending on your horizon and risk preference. Long 30-year horizon Aggressive funds have earned 25%, capturing much of the US stock market's 32% rise. As for the shortest horizon investments, the Now Aggressive funds have earned 20%. By contrast, the Conservative benchmark has lagged for all horizons. Aggressiveness won this year.
But Aggressive doesn't always win. The Conservative glide path has a history of success in the face of challenges. All horizons were the best performing in 2008, 2011, and 2018, and Conservative has won by not losing over the history of TDFs.
As shown in the following "Mountain Chart", the Conservative path is much more defensive for short horizons and much more diversified at long horizons. Also (not shown) the Conservative path lowered its bond maturities in 2014 because the risks do not justify the rewards.
The next section provides details to determine why you're winning or losing. If you've allocated to better performing asset classes, you should be winning. But if you've concentrated in poorly performing assets, your performance will likely lag. Learning why your performance is good or bad is a good way to start refinements to your asset allocation in 2020.
Asset Class Performance
Every asset class earned positive returns in 2019. The word "bubble" appears every day in numerous articles. US stocks are continuing their unprecedented run. Real estate has surged this year. US interest rates threaten to plunge below zero. At the same time, there may still be bargains in segments that are lagging this year like foreign bonds. What is your outlook for momentum and reversals?
Did you succeeded or fail in 2019? What changes will you be making for the rest of the year?
Despite the current good fortune, or perhaps because of it, market observers see a recession on the horizon, largely because the current recovery is the longest on record, it's global, and it's running out of steam. Also, there is a World Debt Crisis that will not end well.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.