Measuring Investment Performance

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Craig Israelsen, Ph.D., creator of the 7Twelve portfolio, consultant to 7Twelve Advisors, LLC and executive-in-residence in the Financial Planning Program at Utah Valley University. 

How often does the S&P 500 Index produce a positive return? That depends entirely on how often we measure its performance. 

If we checked at the end of each month, the S&P 500 produced positive monthly returns 65.6% of the time from January 1979 through April 2022. That’s more than 43 years. The average monthly return for large cap stocks was 1.05%. On the flip side, we would have observed a negative return 34.4% of the time—fully one-third of the 520 months since 1979. We only saw this because we looked too often. 

What about bonds? Over the same time period, the Bloomberg Aggregate Bond Index produced positive monthly returns 67.1% of the time and the average monthly return was 0.57%. The frequency of positive returns between large cap U.S. stock and U.S. bonds is not much different—at least since 1979.  

But there is a difference in the magnitude of the size of the negative returns. The average negative monthly return for the S&P 500 was -3.51%, whereas the average negative return for U.S. bonds was -0.93% (or not quite a 1% loss).  

Frequency of negative returns is one thing—magnitude is clearly another. This is why stock investors and bond investors need to contemplate both frequency of negative returns and magnitude of negative returns. But just as important, there needs to be a rational approach regarding how often we take the pulse of the investment. 

Hopefully we can agree that checking an investment portfolio each month is just a tad too often for the average investor. Actually … far too often. Let’s move away from the microwave and consider using a crockpot when it comes to checking a “long-term” portfolio. 

Rolling 12-Month Intervals 

How about checking every 12 months? Using a rolling 12-month period as a measuring stick, the S&P 500 Index produced positive 12-month returns 83.1% of the time and bonds 88.6% of the time.  

Here again, we need to examine both frequency of returns and size of returns. The average 12-month return for the S&P 500 Index was 13.55% (over 509 rolling 12-month returns from January 1979 through April 2022). The average 12-month bond return was 7.35%. Big difference. 

Here's an idea: Let’s blend stocks and bonds together in a simple two-asset portfolio. The typical ratio is 60% stocks and 40% bonds—known for many years as the “balanced” portfolio. Since 1970, this 60/40 portfolio produced positive monthly returns 67.3% of the time and the average monthly return was 0.85%, or not quite a 1% return.  

Let’s be more patient and check the performance of the 60/40 portfolio after 12 months. The average return was 11.01% and it produced positive returns 85.9% of the time. When it did produce a negative 12-month return (about 14% of the time) the average loss was -6.51%.  

A Five-Year Crockpot 

What if we turn on the crockpot and let our investments marinate for five years? From January 1979 through April 2022, there were 461 rolling 60-month periods. A 60/40 portfolio produced positive five-year returns 99.3% of the time! 

The average 60-month annualized return was 10.37% over the 461 rolling five-year periods. There were only three rolling 60-month periods that produced a negative average annualized return—the worst of which was -2.26% (which occurred during the five-year period that ended on February 28, 2009). 

When we use a crockpot to prepare a meal, it makes no sense to check it every 10 minutes. Measuring the performance of investments isn’t much different. When we micro-measure performance, we needlessly observe returns (gains or losses) that really don’t matter if we have already made a long-term commitment to the portfolio.  

Daily and intra-day performance just represents noise, kind of like a microwave timer that you can’t turn off!  

So, if you want to see better performance, check your portfolio less often. And buy a crockpot.