The Tale of Two Investors

     Right now, we are coming off one of the longest periods of stock market growth. The past couple of weeks we have seen increased pressure on the stock market.  If you are like many investors, I am sure you are wondering what you should be doing now.  Because I have been receiving this question lately, I thought I would share some thoughts on what I think it takes to have a successful investment strategy over time.

     To help explain, I would like to share a story with you.  I call it the tale of 2 investors.  It starts off with Brad and Jenn who work with 2 different financial advisors.  They each give their advisor $100,000 and they develop an investment strategy.

     At the end of the year, they meet with their advisor to see how they have done. A few days later, they bump into each other at the company Christmas party and happen to discuss how their investments did over the last year.  Brad says to Jenny, my advisor did a great job this year, I was up 26% this year. How did you do?  Well I thought I had done pretty well, but I was only up 8%. So, I guess not as well as I thought after hearing about how you did.  I guess I am going to have to give my advisor a call and see what’s up?

     Well another year passes, and they again meet up at the Christmas party and again discuss their results.  Jenny starts off with it hasn’t been a very good year, I am down 10%.  Brad says well your advisor got lucky this year.  Jenny asks why is that? To which Brad replies I am down 35%.  But the market is down 38%, so at least I am beating the market.  They chat for a few more minutes and go on their separate ways.

     Well let’s check back in one last time, one year later to see what’s happened. Brad starts off feeling pretty good, I am up 18% this year.  Jenny just shrugs her shoulders and says, again I thought I was doing well being up 11%, but you again did a lot better than I did.  You beat me 2 of the last 3 years and by a lot.  Maybe I should switch to your advisor, let me get their number.

     Which portfolio do you think did better - The portfolio that is more volatile with higher returning years or the less volatile with lower returns in the up years? I need your answer before you move ahead.

     Well let’s take a look.  If we look at the simple average both portfolios had a return of 3%.  To get that you take the 3 years and add them together and divide by 3 to get the average of 3%.  So from there you might say, I guess they both were the same, as they had the same average (simple) return.  But what many investors do not understand is how negative returns affect their actual rate of return.


Simple Average

Cumulative Return

Annualized Return

Ending Value











     A lot of people that I talk to find it hard to believe that if you have an average return of 3% that you can end up with less money than you started with.  But that is what larger losses due to a portfolio.  I could share this same concept with you using longer time periods and different examples to show the same point, but for this article I will leave it at this one today.

     Which portfolio did you pick?  Have you ever heard anyone say: “To get better investment returns you have to take more risk”?  Have you ever said that?  After seeing my above example do you still believe that?

     There are times when taking extra risk may be of benefit, but do you understand the risks in your portfolio?  Does your investment strategy have a process to try hedge different types of risks or are you in something similar to the most common type of portfolio I see, the 60/40. The 60/40 is a portfolio comprised of 60% stocks and 40% bonds.  Most people have some variation of this.  If you are not sure how your portfolio might react during the next market down turn or what job each investment in your portfolio is playing, I would recommend sitting down with your advisor to get a better understanding.  Maybe it is even time to get a 2ndopinion.  If you would like to discuss reviewing your portfolio, please feel free to reach out to me.  I would be happy to discuss how I construct a portfolio that is different than the typical 60/40 stock bond portfolio.  Let me just say that adding in a 10-15% sleeve called alternatives may not be the necessary prescription.

-This article is not investment advice but is meant to discuss some investment principles that I believe in, that I think can be used to help evaluate ones own strategy.-