Bullshit on Stilts: Tackling the bullshitology of financial decisions.

Are Your Investments on Track? Comparing Performance to Benchmarks

• Keli Alo & Mark Robinson • Season 1 • Episode 12

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Ever wondered how to tell if your investment advice is leading you down a garden path? This episode of Bullshit on Stilts has you covered, as we spotlight the essential practice of assessing your investment performance against independent benchmarks. Learn how 401k accounts display performance metrics and why comparing your returns with indexes like the S&P 500 or the Russell 1000 is critical. We dive into the challenges of active management versus passive investment and highlight the importance of evaluating your investment performance over appropriate intervals, such as year-to-date and multi-year periods. By focusing on these longer intervals, we help you avoid the pitfalls of short-term thinking and gain a clearer picture of your investment efficacy.

Choosing between benchmarks can be a maze, but we simplify it in a way that's both informative and entertaining. Discover why institutions might lean towards the Russell 1000 while retail investors often prefer the S&P 500, and learn about creating composite benchmarks tailored to your portfolio. We use practical examples like a 60% stock and 40% bond allocation to illustrate how to blend different indexes for accurate performance measurement. By the end of this episode, you'll know exactly what you own, why you own it, and how it measures up against relevant benchmarks. Tune in for a mix of serious analysis, hijinks, and tomfoolery, and take control of your investments with newfound confidence.

Developing your financial bullshit sniffer one episode at a time.

Keli Alo:

Welcome to Bullshit on Stilts, a podcast hosted by two guys with vast financial backgrounds and great bullshit sniffers who call out the cliche crap, spackle and flap doodle spewed by so-called experts across the landscape of financial advice Identifying as doctors of bullshitology. You can count on your esteemed hosts okay, maybe knuckleheads to bring you a lively, if not deadly, mix of bullshitology. You can count on your esteemed hosts okay, maybe knuckleheads to bring you a lively, if not deadly, mix of serious analysis, hijinks and tomfoolery, all within a 99.1% bullshit-free safe space. Let's get after it All, right. So today, on Bullshit on Stilts, we're going to continue on with our sequence of breaking down spotting sloppy investment advice. Right, that was our episode seven, where we really introduced the Fab Five questions. Right, and Mark, walk through those Fab Five questions real quick when it comes to helping people have control in their investments and spotting sloppy investment advice.

Mark Robinson:

Sure. Number one is what do you own? Number two why do you own it? Number three how you doing. Number four compared to what and number five is what?

Keli Alo:

am I paying for? That's right, yeah. What are my total costs? So today we want to focus on question number four, right Critical question of comparing how you're doing question number three to something that is meaningful. It's a independent measure of whether you're doing good or bad or whatever, rather than just conjecture right, right, which can overstate or understate how you did, sure.

Keli Alo:

So do 401k accounts and their statements. Do they show you how you're doing compared to something, or do they just say, hey, here's how you're doing Indeed, and in fact they are mandated to.

Mark Robinson:

So when you are selecting funds or when you are shown your return, they will show a representative benchmark, and by that I mean if you're, let's say, in large cap stocks, you'd be measured against an index like the S&P 500 or the Russell 1000. So it gives you how am I doing and compared to what?

Keli Alo:

Yeah, so real quick, you can take a look. And if I don't know how it's represented, I'm sure different 401k providers have different ways to present that. But let's say your chart is lower than the index chart, you know you're probably not doing as well as the index over whatever time period the measurement is provided for. Is that fair to say Correct, okay. Is that fair to say Correct, okay. And if your bar or your pie shape or whatever is larger than the comparative index or benchmark, then you're doing better Victory.

Mark Robinson:

For that snapshot. You're doing better, yes.

Keli Alo:

Okay, you had mentioned during the last podcast, which was how you're doing, that while active management has outperformed index or passive investment management for maybe one, two or three years, but over longer periods of time, it's extremely difficult to actually outperform the index when you take into account the cost of the active management, the trading going on, which there is a cost to the internal trading of things and so forth. So I think that this becomes, like you just said, for the time period that's measured in your 401k account that we're talking about, if your bar is bigger than the index bar for that time period the last year, year to date, last three years, whatever they're showing you at least in that time period you've done better. If you expand the measurement five years or 10 years maybe you're not doing as well as in that short time period.

Mark Robinson:

So what would be an appropriate interval? So if we're talking about returns, so how did I do? And compared to what, what is an interval? So certainly a monthly statement. All we're showing is noise for the most part. Yeah, just the ups and downs. I'm sorry, but I cannot fix this problem for you.

Keli Alo:

So certainly a monthly statement all we're showing is noise for the most part. Yeah, just the ups and downs.

Mark Robinson:

I'm sorry, but I cannot fix this problem for you. So what would be an appropriate or useful probably a better word a useful interval for measuring that? Would it be one year, three years, five?

Keli Alo:

years. From my standpoint, when we've done the work for clientele and helping them assess and measure things, we typically look at year-to-date one year, three year, five year. We also look at calendar years Because when you take something that's five years, it hides the roller coaster. It just says, well, over the five years you've averaged 8.38% on average. But averages really don't tell a story. They just give you kind of a thumbprint. That's really not that telling. However, if you look at five years of calendar year returns or five 12-month periods of time, you'll start seeing that roller coaster. So when the market corrected year four, did your account correct more or less than your benchmark? That's important to know. Going back to your question, tended to do one, three, five years. Beyond that, it becomes typically very different market cycles, very different interest rates, maybe even different portfolio management team at the helm of the investment portfolio you're using. So all of those create a lot of noise beyond that.

Mark Robinson:

Yeah, and I think it can misstate the efficacy or the inefficacy of what you're doing if you measure over too short of a time horizon. And I think our focus ought not be over the short term horizon and I think our focus ought not be over the short term. Most things in life where we truly accrue value are not measured in short intervals. It's more of a compounding over a multiple whatever the interval is multiple month or quarter or yearly basis where we can truly see if things are working for us or not.

Keli Alo:

I agree with you, Juan, that investors, consumers out there, non-professional investors, let's say are very focused on the near term. What are you doing Last month, this quarter, last year, this year, whatever? They're very because it's, they can feel it, it's tangible, they're living it right now. So they tend to look at that and then want to make decisions based on their belly and emotions.

Mark Robinson:

And I feel sorry for you.

Keli Alo:

Around what they're doing. It's not working. It is working, and yet when we talk average investing returns, typically we're talking long-term averages 10, 15, 20 years and if you're always changing the method by which you want to get from a to b, you never get to be all the time. Even more so now right.

Mark Robinson:

Sure we can get caught up in the short-term returns, like many did in the late 90s when technology stock funds were going up 50, 70, 100 percent a year.

Keli Alo:

Yeah, the old monkey throwing the dart at the newspaper yes, you make fun of me. You're bringing up monkeys again you just don't like monkeys for some reason I don't get it.

Keli Alo:

Well, you did mention it was your birthright. It was, yeah, born of the monkey. I mean that means a lot. And what a lot of people don't necessarily appreciate is when you look at an index, whether it's the S&P 500, the Russell 1000, the Russell 3000, the Wilshire 5000, I mean they're just oodles and oodles of indexes out there. But when you're measuring that, what you're actually looking at is a large like 90 plus percent of the US stock market in my example. As a result, what's in it is every industrial sector and segment is typically represented in that one investment holding, typically represented in that one investment holding.

Peanut Gallery:

Hey guys, this is the Boots Kelly. You're getting this wrong again. Industrials is one of 11 sectors in the S&P 500 index. There's a whole bunch technology, financial services, communication services but only one industrial sector Jeez.

Keli Alo:

So do you really need more technology when the S&P's value has been driven by Netflix, amazon, google I mean all of these companies are in there Do you need to have a specific exposure to it? That's up to you as an individual whether you want to have more exposure to a segment of the market. But if you buy the S&P, if you buy the Russell 1000 as an index investment and a passive investment, saving on management fees and saying you know, long term I'm going to be just fine, you have technology, you have oil and gas, you have consumer cyclical and defensive you have all of those segments represented.

Mark Robinson:

I think one of the problems that individual investors run into and certainly marketing doesn't help is we want to get in there and help. Am I even on? Yeah, I am.

Keli Alo:

I actually didn't turn it off. I don't know where that's going this time. I didn't turn it off. We're interested in what you have to say.

Mark Robinson:

Mark, we want to get in there and help, but it might not be the most effective strategy if what we're trying to do is build wealth over the long term for your serious money.

Mark Robinson:

I'm not disparaging stock traders at all but I think for your serious money, it's better to buy large indices, whether it's through active management or through passive index investing, than to try to use your expressions in the marketplace and what you think you ought to be investing in as a way of building toward a terminal wealth value. More often than not, the better approach is just to let the markets do their thing.

Peanut Gallery:

Hell yeah, that's what I'm talking about.

Mark Robinson:

The better approach is just to let the markets do their thing.

Keli Alo:

I agree with that. Generally speaking, I've worked with people that are very, very good at selecting stocks and running their accounts.

Mark Robinson:

How do you know? They were very good.

Keli Alo:

Based on looking at their statements and analyzing it for them on a quarterly basis. So you compared it, yeah. So, getting back to the, compared to what? Yeah absolutely.

Mark Robinson:

In my experience, most didn't it. So, getting back to the, compared to what, in my experience, most didn't, it felt good, so it was good. How am I doing in compared to what? That has more meaning when it's measured over longer intervals of time and it takes the competitiveness out of it and it adds in more of what we should be thinking about or evaluating is efficacy, not the competitiveness. Did I beat the S&P 500 this quarter or this year? It might be an exciting observation, but is it important, right? What about my asset allocation? Not so much about the security selection, but I'm measuring against a broad index. Yes, and that's more at the asset allocation level, not at the security selection or how my manager did. Why don't you repeat again where does return come from? Right?

Keli Alo:

Where do we derive return from in investment portfolios? So these are portfolios, stocks, bonds, cash and so forth. But if my memory serves, portfolios, stocks, bonds, cash and so forth, but if my memory serves, roughly 88% of your return and your risk over time is attributable simply to the decision of your mix. What percentage do you have in stocks, bonds, cash and or alternative investments, your asset allocation or your allocation plan? 88% goes there, not who manages it, not what investment house manufactures it, not even that they decided to buy Lowe's and not buy Home Depot. The manager and the securities together were less than a 10% determinant of long-term return and risk. So what we've been talking about quite a bit has simply been let's focus on the 8,800-pound gorilla in the equation and let's not worry about the 9, 10% or 90 to 100-pound gorilla, which is manager, security, selection and so forth.

Mark Robinson:

Show me that you're approximating the benchmarks that represent your asset allocations to stocks, bonds, alternative investments. Show me that Once you show efficacy there with the basics, the compulsories, then we can talk about how you selected your small cap technology stock.

Keli Alo:

Let's talk about how do you compare? So, compared to what, I'll throw some things out, or if you want to throw things out.

Mark Robinson:

We're going to start with this whole podcast oh excuse me.

Keli Alo:

In fact, just disregard everything you've heard thus far and we're going to start now. When you're comparing your investments, there are different comparisons and we've referred to the S&P 500, boatload right, but that's not the only index. S&p 500, boatload right, but that's not the only index. As we've talked about, if I'm in large company stocks in the US, s&p 500, claire is an index I can use to compare my large company stock holdings to the S&P 500.

Mark Robinson:

Fair Fair Is that the only one, no, but it is the most recognized and most reported by yes with the S&P 500.

Keli Alo:

Yeah, every night on news you'll hear what the S&P.

Mark Robinson:

Now you can get into other indexes, like the Russell 1000, which is put together differently than the S&P 500 is. Yes, and if you choose to use the Russell 1000, and here's where we start getting into the fineries of this that I don't know whether they add incremental value. Now, once you've demonstrated to me that you are saving on a regular basis and you have arrived at the amount that you need to be saving on a regular basis, your asset allocation comports with your need for a certain rate of return for a given risk level. And you're aware of your returns, now that we're starting to measure them against something, the compared to what. Now you've matriculated up to where we can start to talk about what is a more appropriate benchmark. Is it the S&P 500, or do you want to use the Russell 1000? And Kelly real quick, 500, or do you want to use the Russell 1000? And Kelly real quick, explain the difference between how the S&P 500 is constituted and how the Russell 1000 is.

Keli Alo:

When we're thinking about the S&P 500 versus the Russell 1000,. Both represent the US stock markets, both represent large companies that are listed in the US, us domicile companies, and both, really, when you look at performance, when you look at risk factors, when you look at volatility, they're right on top of each other. It's like they're playing piggyback.

Mark Robinson:

Yeehaw.

Keli Alo:

It becomes academic. I can tell you that institutions prefer to compare their investments in large stocks in the US to a Russell 1000 or a Russell 3000. They prefer that over the S&P Investment managers that sell products to retail investors prefer the S&P 500 because it's reported and it's widely known and it's somewhat familiar.

Keli Alo:

Almost nobody outside of institutional land relies on the Wilshire 5,000. Now what's interesting is again another US stock market index that you could use to compare. It now houses over. Well, last time I looked it was like over 7,200 stocks make up the Wilshire 5,000, which is a little confusing to my brain.

Mark Robinson:

Well, you're making progress because, you used to call it the Worcestershire 5000.

Keli Alo:

I did, yeah, and if you mix that with ketchup it is absolutely delicious with steak. Just another purpose for our index Absolutely, absolutely. So there are other indexes to measure by what's your preference. We typically will use the S&P 500 when it comes to US large cap stocks. When it comes to US medium size or mid cap companies, we'll typically rely on the S&P 400. And if we're looking at small companies listed in the US small stock companies, otherwise known as small cap we'll rely on the S&P 600. We can use other indexes, so Russell 1000, we can use Russell 2500 for small and mid cap. We can use all sorts of indexes, but we typically refer to the S&P simply because of the familiarity and it's easy to find. And at least on the 500, you're going to hear what happened there every night on local and national news.

Keli Alo:

The Fab Five questions when it comes to spotting sloppy investment advice is really around confirming for yourself that you are indeed in control of your investments. And so it's built in chronological order. What do you own? There's the first question. You can't go on to how you're doing unless you know what you own. You can, but then it's kind of self-defeating. It's like I really like that dish you made. Can you give me the recipe. I don't have a recipe. No recipe, don't know how I made it, but I'm glad you enjoyed it. So it's chronological. What do you own? Why do you own it? How are you doing now compared to what? Here's something that I think we haven't touched on and I think it's important when it comes to compared to what.

Keli Alo:

When you look at your statement, there's oftentimes ITD as an acronym associated with some kind of a return that's reported to you ITD standing for inception to date. So what happens if I invest my money and I'll just use 401k as an example? Let's say I started to contribute to my 401k and my money's automatically going in. It's going to be really simple and I'm investing in an S&P 500 index fund and the first date of my purchase is October 6th of XYZ year, and now it's December 31st, two years later. How do I compare my inception to day performance compared to an index when my first day invested was October 6th? How do I come up with figuring out what the index did if it's not presented for me and I'll tell you how I do it I will sometimes look at the index itself, but it's non-investable, as we've kind of alluded to in the past.

Keli Alo:

The S&P 500 has an index. You can't invest in it, but there are mutual funds and exchange traded funds, index funds, that do just that. So you pick one of those funds and you go back to the historical value of the price. On october 6th of that year, your start year, let's say the price was a hundred dollars for an s? P exchange traded fund, an index fund, and then you take it all the way to today, what you're trying to measure, and what's the s? M? P funds share price now, let's say it's 150, I now have my start and my end values and I go back to how am I doing? I take my end value 150, minus my beginning value 100, divided by 100 times 100. And guess what? In this example, I'm going to come up with my index that I'm comparing my personal performance against as a estimated simple return number. And now I know how tall that S&P index is from October 6th to this year, two and a half years later.

Mark Robinson:

So you can do an interim point in time rather than doing it on a quarterly basis or an annual basis based on your inception, if that's important to you.

Keli Alo:

But the point is, if you have an index, if you can't find the actual index numbers for a beginning end, you can use a low-cost index fund to accomplish roughly the same thing. This isn't precision. It's like when you put a mark on the wall, when you're measuring your kids as they're getting taller. It's rarely scientific. It's just put a ruler against their head and then draw a mark.

Mark Robinson:

That's probably not as accurate as them going to the hospital and getting a height measurement, but good enough so let's summarize this if you are investing in a 401k, on your statement or when you're going through the selection process for what you want to invest in, they have all the active managers or the indexes that you can invest in, but they also have benchmarks. So you have the benchmarks that are typically provided by whomever the 401k vendor is, and there are appropriate benchmarks for the mutual funds in that category. Pick one. You can use that If you want to do this yourself. Often it's right there for you how your asset allocation did in relative to a benchmark. That's right. Or you can do it yourself. You can pick another benchmark. That's right, because usually they have two or so representative benchmark or a category yeah, investment category, average in there. So you can do it that way in your 401k. You can do that. Also, if you have an IRA, you can find an appropriate benchmark Because often if you just go into a service and you put in the name of your mutual fund, the ticker or the name of it, it'll show you what the investment category is and the index.

Mark Robinson:

All right. So now you already have your index so you can cobble together your performance relative to that index. That compared to what, if you so choose to do that yourself. So, as our example before was 60% in stocks and 40% in bonds, so if most of your stocks are in the S&P 500, grab that number 40% are in bonds and they say that's the bar cap intermediate bond. Okay, I got that number. Now you can do the math as we talked about in our last podcast and see what your blended benchmark you called it a sandwich. When you bring the two together, measure them separately and then bring them together in their weighted percentages, it can be interesting, it can be fun, if you like numbers.

Keli Alo:

Yeah, and I know I'm pretty hard on that, but You've been examined several times for considering calculating returns as fun.

Mark Robinson:

But, as you said last week, you rarely pay attention.

Keli Alo:

I try not to listen. I'm never disappointed when I'm not listening to you.