You Didn’t Beat the Market?

You Didn’t Beat the Market?

It’s a new year and all the investment results are in. We at MainStreet keep seeing 15+ percentage point increases for several asset classes and mutual funds for the year just past. You probably do too. Now everyone is wondering why their accounts didn’t go up 15 percent and why some bond funds went up in value a lot with interest rates so low.

Attention: An account or total holdings is NOT an asset class. That’s all your eggs in one basket. Today’s big winner is liable to become a big loser in a correction.

Bonds and bond funds got repriced higher by the market last year just like houses did last year. It’s supply and demand. Every day, mutual fund custodians must mark securities as if they were sold at the end of the day to what price would they fetch.

The holdings in the bond funds are higher than the lower interest ones now just coming onto the market. Therefore, investors want the older bonds and bid up the fund share price to obtain a better return. When interest rates fell last year, then the value of the bond or bond funds currently held are worth more to a buyer since new bonds just being issued pay less.

The same holds true for other asset classes or mutual funds that weren’t as popular last year. Commodities, including energy funds, and both domestic and foreign commercial real estate didn’t do as well and were worth less at the end of 2020.

My old boss, Billionaire Money Manager Ken Fisher, said it best: “If investors think profits are going up, they buy stocks. If investors think profits are going down, they sell stocks.” They do that individually or via mutual funds. Investors have alternatives to where their money is currently deployed.

Remember the sage adage, “Buy low, sell high”? Well now might be the time to implement change by rebalancing. I know it’s hard to sell last year’s winner since we assume it will continue to go up and buy last year’s loser assuming it will go down some more. Both opinions could be correct.

However, over time, it appears that the markets are self-correcting and usually correct at some surprise point no one can predict in advance. Rebalancing to a target percentage has proved to be the soundest strategy over longer periods of time, say five to ten years.

If you’d like to read up more on this philosophy, then we recommend Charles Ellis’ “Winning the Loser’s Game” 7th edition, and William Bernstein’s “The Four Pillars of Investing” second edition.

So be happy that a lot of your holdings went way up last year and that you are ahead of your target percentages for the past five years. Don’t dwell on the losers so much that you miss an opportunity to dollar cost average a bargain if it still is a viable asset class.

Good luck. We’ll all need it this year.

Jim Ludwick
Jim Ludwick

Jim Ludwick is the founder of MainStreet Financial Planning. His varied education and life experiences have enabled him to apply his knowledge and experience into useful solutions for personal financial problems. His writing and broadcasting activities allow him to help many more than just individual clients. He loves a microphone.

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