Internal Measurement vs External Measurements

By Brad Thomason, CPA

​​The S&P 500 just closed up 28% for the year of 2019.  Which is a big number, and an accurate number.
 
But is it a misleading number?
 
A big part of the reason that 2019 looks so good, is because 2018 finished the year basically at the bottom of a pretty sizeable dip.  So the recovery of that dip boosted the results for 2019. 
 
How much so?  Well, let’s put it this way.  While the 12-month result was 28%, the 15-month result was around 10.5%.  Same stock market.  Same impact on any holdings you had going into the Q4 2018 dip.  Now, to be sure, 10.5% is still a healthy increase.  But it certainly isn’t the same as the 12-month number.
 
The 24-month annualized average shows an even more tame picture, by the way:  about 7%, compounded for both years.
 
Part of the problem with trying to interpret statistical information about outside events is that it is not always clear what the implications are for your portfolio.   For instance, if you had two investors, one of whom was fully invested 24 months ago (a typical scenario for a retiree) versus someone who started their investing career on 1/1/2019, you would have vastly different results from the exact same market. 
 
So part of the challenge of answering the question ‘how does this affect me?’ is tied to all of the particularities of your individual story.
 
External measurements mean different things for different people; and even different things depending on how many weeks or months you include in the measurement picture.  That’s a lot of non-specificity, you know?
 
When looking for more solid ground, one approach is to focus more on internal measurements than the external ones.
 
You know how much your current investment balances are.
 
You know how you have your capital allocated among the various asset classes.
 
You know what percentage of your investments could be affected by a major downturn in a particular market or some other sort of loss.
 
You know more or less how much you are going to need to spend for planned items in a typical year.
 
These are the elements which form the backbone of both a current assessment, and the basis for future plans. 
 
Moreover, there are important principles which don’t change at all, whether the market is going up, going down, or doing nothing at all.  These include the understanding that when the retirement period starts, the job of the portfolio changes from growing, to providing a source for income withdrawals.  Another one?  The understanding that the risk level needs to come down as you age, and that the way that happens mechanically is by reallocating balances, or depleting higher risk pools of money ahead of lower risk pools (and in most real-world cases, likely some combination of the two).
 
When the stock market has a nice run, and you end up with more money than you had in the past, that’s a good thing.  For sure, it is.  Great to experience, and fun to talk about.
 
But don’t let that distract you from the more enduring aspects of what’s important.  You won’t find them listed in the Wall Street Journal.  Instead, you already have that information at your finger tips – or if you don’t you certainly know how to get to it.  That’s the stuff you should be paying the most attention to as you plan, act, monitor and adjust your finances in the service of getting an eventual win in the retirement game.