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Wednesday, March 31, 2021

Last year's winning trades are this year's losing trades

Fortunes are won and lost quickly in the financial markets.

If you are lucky enough to be sitting on a stock portfolio that's generating market beating returns, how long can that last?

On Tuesday, Compound Capital Advisors' Charlie Bilello shared some relevant stats.

"The 25 stocks in the S&P 500 with the lowest returns last year are all positive to start the year, with a median return of +32%," he observed. "On the flip side, the best performing stocks from last year are underperforming with a median return of -3% to start the year."

Indeed, the S&P 500's (^GSPC) 6% year-to-date gain belies rotation trades that are rocking the market. And so, depending on if, when and how you rebalanced your stock portfolio, you may have gone from outperforming to underperforming.

And to be clear, it's not easy to get this right. As we've written before, most pros can't even beat the market. According to S&P Dow Jones data, more than half of active large-cap equity fund managers have underperformed the S&P 500 in each of the last 11 years.

Furthermore, fund managers in the top 50th percentile in performance in their categories in a given year rarely stay on top in the years that follow.

"In fact, it was more likely for a top-half fund to close its doors or change its style (41.5% combined) than repeat its performance in the top half," S&P Dow Jones' Berlinda Liu and Gaurav Sinha observed base on the five-year period from June 2015 to June 2020.

'Time is money'

Every investor and trader would love to exploit what they believe to be lows and highs in the market. But not only will they often find themselves in the market at inopportune times, but also out of the market during opportune ones.

"Market timing is difficult," BofA strategist Savita Subramanian wrote last week. "Since the 1930s, if an investor sat out the 10 best return days per decade, his/her returns would be just 28% compared to >17,000% (17,715%) returns since then."

This is work we've cited before, and you'll probably see us cite it again.

Her advice for investors who have a tough time stomaching losses: "Time is money. For stocks, the best recipe for loss avoidance is time. The probability of losing money over one day is a little worse than a coin-flip (46%), but the probability declines to just 6% over a 10-year window since 1929."