The power of portfolio consistency
From: financial-planning.com
Consistency of portfolio performance is quite an enigma. On the one hand, it’s what many investors, including your clients, will claim they want. On the other, many won’t stick with a portfolio long enough to ever experience its consistency.
Thus, if a portfolio actually demonstrates performance consistency, will anyone actually notice?
Let’s examine the consistency of rolling five-year annualized returns for 12 major asset class indexes and a portfolio that incorporates all 12 indexes in equal 8.33% allocations. The time frame we’ll look at is the 18-year period from 1998 to 2015, which produced 14 rolling five-year periods.
The 12 indexes in this analysis are the S&P 500, S&P Midcap 400 Index, S&P 600 SmallCap Index, MSCI EAFE Index, MSCI Emerging Markets Index, Dow Jones U.S. Select REIT Index, S&P North American Natural Resources Sector Index, Deutsche Bank Liquid Commodity – Optimum Yield Index, Barclays U.S. Aggregate Bond Index, Barclays U.S. TIPS Index, Barclays Global Treasury ex-U.S. Index and 3-month U.S. Treasury Bills (representing the return of cash).
The combination of all 12 indexes creates a diversified portfolio with a 65% allocation to equities and diversifier asset classes and a 35% allocation to fixed-income asset classes (as shown in “Diversified Portfolio”).
A reasonable measurement standard for a portfolio is its performance over periods of time, a minimum being three to five years. Portfolios or models that have stellar performance for a brief time period and then fall off the next quarter or year are not likely to satisfy clients who desire stability and consistency.
Shown in “Rolling Performance” are the rolling five-year annualized returns for each of the 12 indexes and the diversified 12-index portfolio. Cells highlighted in pink represent a negative five-year return, cells highlighted in green indicate a five-year return above 10% and yellow cells indicate a five-year annualized return above 20%.
As can be seen, the S&P 500 over the 14 five-year rolling periods from 1998 to 2015 had five with a negative annualized return. By comparison, the S&P Midcap 400 only had one five-year period with a negative annualized return. The S&P SmallCap 600 had no five-year periods since 1998 with a negative return, six five-year periods above 10% and one five-year period with an annualized return above 20%.
The S&P 500 produced an average five-year return of 4.6%, whereas the S&P midcap and small- cap indexes have nearly doubled that — both producing an average five-year rolling return of 9.1%.
In terms of raw performance and consistency of performance, the S&P Midcap 400 and S&P SmallCap Index have outperformed the S&P 500 by a considerable margin over the past 18 years, both in raw performance and consistency.
