Broker Check

Past Performance Can't Guarantee - But It Can Be Informative

July 06, 2017

Look Past Recent Performance To Include Dissimilar Markets

Markets have been very strong of late.  Stocks have done well since the election, and bonds have yet to react negatively to rising interest rates.  International stocks in particular have been doing very well, after years of under-performing their U.S. peers. 

When choosing investments, many investors look primarily at past performance.  It is easy to understand, and the statistics are readily available.  In a 401k, this is often the only real information an investor is provided about investment choices - unless they are willing to do some serious digging. 

Choosing funds (or ditching them) based on past performance alone - in particular recent performance - can be dangerous.  For instance, the last year or so has been great for stocks, in particular international stocks.  Based on recent past performance, I would want nothing but stocks in my portfolio.   But if we have learned one thing for certain over the years, it is that markets change.  This years winners may very well be next years losers, and vice versa. 

To illustrate that point, lets consider the investments we use in our own portfolios.  In the below chart, we have looked at recent Q2 and 2017 YTD returns.  We also consider returns in the 3 most recent down years for the stock market - 2015, 2011, and 2008, as well as 10 year total returns.  

Q2 20172017 YTD20152011200810 year 
US Stocks:  
DFA Core Equity 12.59%8.30%-1.35%-0.64%-36.53%7.17%
DFA Core Equity 22.15%6.80%-3.07%-2.10%-36.86%6.70%
International Stocks
DFA International Core6.3814.39%-0.21%-15.11%-44.01%1.77%
Virtus Emerging Markets8.68%22.15%-8.77%-3.13%-46.04%4.39%
Bonds / Income: 
Metropolitan West Bond1.33%2.02%-0.05%5.19%-1.47%5.82%
Pimco Income2.18%5.09%2.28%6.09%-5.79%9.15%
Principal Preferred Stock3.73%8.06%4.69%1.17%-22.42%6.78%
Flaherty and Crumine Income7.27%16.71%5.20%19.18%-45.77%11.21%
Ishares Residential Real Estate3.96%7.41%11.37%16.03%-24.81%7.11%
Templeton Global Bond-1.28%3.49%-4.26%-2.37%6.28%6.28%
Hedging / Alternatives
Catalyst Hedged Commodity0.73%6.48%n/an/an/an/a
Catalyst Hedged Futures0.12%-17%7.98%16.43%50.24%11.41%
Millburn Strategy-1.88%4.28%1.50%-7.43%5.07%6.69%
SPDR Gold Shares-0.59%6.30%-10.67%9.57%4.96%6.11%

Looking at these select data points, and applying a little thoughtful analysis, we can learn a lot more than simply reacting to last quarters results.


One of the first things that might strike you is the similarity of returns when you extend your time horizon back 10 years.  All of the investments showed pretty decent returns over a 10 year time period.  During this time we had a major financial crisis with a major market meltdown, as well as one of the longest running bull markets for stocks in history.  Despite all of that – it appears you could have bought and held any one of these funds by itself and done pretty well for yourself.  (well, except international stocks…that’s complicated…) 

But what do I do with that piece of information?  Can I simply decide that I should put all of my money in the Pimco Income Fund and expect a 9.15% return, or the Flaherty and Crumine income fund, and expect an 11.21% return?  Not likely.  Why?  Both of these are funds which own interest earning investments, and with interest rates so low, and perhaps heading higher, it is difficult to imagine that they will earn as much in the next 10 years as they did in the 2008-2017 period.  An investor would be wise to set much more modest goals for income oriented funds.

The data points I’ve provided also shed some light on the idea that markets change.  For most of the past 10 years, US stocks have outperformed overseas stocks.  But in 2017 this has turned around, and international stocks are winners.  Will the next 10 years be a repeat?  Or will international stocks outperform?  Since there is no way to know, we just own them both. 


We can learn a lot by considering recent down markets of 2015, 2011, and 2008.

First, it is good to take a pause and consider that markets do indeed go down from time to time.  Markets have been almost stupid with complacency of late – and that in itself is a worrying sign.  Fact is, stocks will fall again.  We don’t know when.  But it is helpful to consider what to expect when they do. 

Looking at these recent down years, it is interesting to note that income strategies are not always helpful when stocks are down.  In 2008, nearly every bond and income fund was down, some severely.  Were they “bad” investments?  Not really.  It’s just that in 2008 people wanted to sell everything that wasn’t a US government insured investment.  So normally stable investments like preferred stocks and corporate bonds were suffering alongside stocks.    

It is by looking at these down market years that you can see why we include so called “hedging strategies” in our diversified portfolios.   In past down markets, particularly in 2008, these funds were just about the only investment left standing!   Returns during the recent bull market have not been stellar (and in at least one case, have been disappointing!), but these funds have demonstrated strong 10 year returns with generally excellent performance in down markets.  I need to allow for any investment to have a bad year once in a while! 


We own non-stock investments with the hope that they may perform well when stocks are performing poorly.  But each of the down markets illustrated was unque – and not all the non stock funds did well in every down market.

For instance, residential real estate did very well in 2015 and 2011 – but fell out of bed during the financial crisis (it was, after all, a HOUSING crisis!)

Preferred stocks has a similar problem.  While these high dividend "bond like" stocks often hold up well in downturns, they are issued by financial and real estate companies, which were at the heart of the financial crisis.

Bonds have traditionally done well in years when stocks do poorly – but not so much in 2008 when investors weren't sure which companies would survive. 

The hedging strategies did well generally in these challenging years – but Millburn did not come through in 2011 the way it did in 2008 and 2015.  Meanwhile Cataltyst Hedged Futures did fine in 2011, but did poorly in 2017 while the Millburn strategy was doing well in the roaring stock market.  Why?  The strategies are very different from each other and are will react differently in each environment.  

We can’t know what the next market downturn will look like, and so we can’t know what strategy will work best as defense. So we employ multiple defenses simultaneously.   

In fact, that is what diversification is all about.  We don’t know what tomorrow will bring.  We can't know which investment will be tomorrow's top dog, or which will be in the dog house. But there is one thing I know with utter certainty about the future.  It will NOT be the same as yesterday or today.   Likewise, historical returns cannot predict the future, but when studied thoughtfully and with a bit of historical and market context, they can help us to appreciate the wide range of possible outcomes, and can help build a portfolio with a good chance of holding up regardless of what the market throws at us.  

Note:  Performance data provided by Morningstar.  Past performance is no guarantee of future results. Investments can lose money.  Catalyst Hedged Futures and Millburn returns include periods prior to these funds conversion from private hedge fund to publicly traded mutual fund.  Strategy remained the same post conversion, but operational differences between fund structures should be considered when analyzing performance.