2020 was exhausting – right? Combining a global pandemic with gut wrenching market movements, social unrest and an election was a pretty potent cocktail. I published a few articles in 2020 , but were any of them actually any good? Let’s crunch the numbers!
Have you read the important notes? It’s a condition for reading the blog.
If you’ve read my blog at all you will be familiar with some fairly consistent messaging – invest for the long term with an asset allocation that meets your risk/return profile and don’t tinker with it and try and find low cost passive vehicles to implement this plan. It’s pretty straightforward so as I looked back on some of my 2020 articles there were a few that really departed from this theme and gave more directional advice on the markets at that point in time.
I’m always quick to complain at the lack of accountability for investment professionals so it seems right to subject myself to the same scrutiny.
If I gave some directional advice over 2020, was it good advice, and crucially, would you have made money following my advice?
There are three articles from early 2020 that I want to focus on and analyze.
- Are you buying the dips?
- Looking for value in the current market
- The market is crazy! No, not the stock market; bonds!
The common theme in these three articles is that I gave some market-driven advice that was current at that time and not simply ‘timeless’ or evergreen advice.
I’m going to go through each of them and award a score;
- ‘A’ – great advice you would have made a fortune following this article!
- ‘B’ – fair advice that could have resulted in some reasonable returns.
- ‘C’ – poor advice, ineffective, too late, serious omission or not directive enough to the reader.
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Are You Buying the Dips?
In this article I presented an argument that the deadlock and uncertainty from the House, Senate and President around potential sustained stimulus would provide sufficient market volatility so that a ‘dip’ was almost certainly imminent. I then invited the buy-the-dip-brigade to provide some governance around whether their trades outperformed a simple buy-to-hold strategy. (Nobody took me up on this!).
So the main advice from this post was to look out for an imminent dip. How did I do?
The above chart shows the level of the S&P 500 from the date of publication to the end of the year. You’ve only got the eyeball this to see a couple of large dips in the ensuing months.
Case closed – right? One point to Team Actuary – yeah? A solid ‘A’ grade for this post?
Well… not quite.
I fell into the exact same deficiency that I was excoriating others. Namely that I was not providing enough governance around my advice. I was claiming that a dip was coming, but I provided no guidance on what constituted a dip and over what timescale.
Sure, if you wait long enough and you don’t actually define what a “dip” is then, you’re gonna be right!
A market correction has a generally recognized definition (drop of 10%), and a bear market is generally recognized as a drop of 20%+, but I have never seen a definition of a dip. How much must a market fall to be termed a ‘dip’, and over what period? I don’t think it’s a well defined concept and I neatly sidestepped giving my definition.
So essentially it’s impossible to assess whether my prediction of an upcoming dip was borne out.
Given the deficiency there is no way this article deserves an A grade, but from the chart above we can see two substantial declines in the two quarters following my article. So I’m gonna give it a B Grade and maintain that I handed a dip to you on a plate, but I was pretty coy about the parameters of what that dip might actually constitute.
Let’s look at the second article.
Looking For Value in the Current Market
I think this was the first article I have ever published recommending a specific tactical tilt into an asset class, but the the extreme market movements we saw in Q1 of 2020 exposed some real value. On March 25th I published this article arguing that High Yield bonds had become extremely attractively priced and very fair compensation for what I argued was an over-blown default expectation.
So how did I do? Was this good advice?
Check out the following chart that shows a Vanguard high yield fund.
I’ve highlighted the article publication date of March 25th and hot damn! That’s pretty much calling the bottom!
So on the face of it that looks pretty good. And when I look at my own personal brokerage account I can see that my high yield investment has returned about 27% to-date. Annualized that’s over 30% return – pretty good!
You can see from the chart below that March 25th was just after the high in spreads and the market obviously agreed with me that spreads were providing too much compensation for the perceived credit risk and over the course of 2020 we saw a steady contraction until the current time when spreads have normalized to pre-COVID levels.
This article is a slam dunk ‘A’ Grade – right? I called the bottom of the market, my investment thesis was borne out, and I made some money (and so could you if you had followed along).
Well…. almost…. but I’m a pretty tough grader.
There were two key omissions in the article.
Firstly I failed to mention taxation, and secondly the Fed action.
High yield bonds throw off a lot coupons (it’s in the name!) and so they are not the most taxably efficient instrument to own. I did not make this point in my article and the returns I cite above are pre-tax. You could have executed this trade in your 401k or tax-deferred vehicle, but most plans don’t have a high yield bond option, or it might be buried in a brokerage option. So I should have given you, the reader, some more implementation advice.
Secondly I failed to mention the potential for Fed action in buying corporate bonds. A few days before my article the Fed announced they would buy bond ETFs, but did not start buying until May and stopped in July. In addition in the middle of June they announced they would start buying individual corporate bonds. I should have mentioned this action, or at least speculated on the potential for this action as it was a strong driver of the eventual performance of the HY market.
So given these last two point I’m going to mark down and give an A- Grade. Still pretty good!
Finally, let’s look at the third, and last, article.
The Market is Crazy! No, Not the Stock Market; Bonds!
A few weeks before the High Yield article I published an article on March 3rd about the long bond market.
Basically I was completely stunned by the sudden drop in yields and wanted some kind of therapeutic outlet for my angst; hence the blog article.
Yields had fallen dramatically meaning that long bond values had soared, and I speculated whether this was a good time for investors who held the physical bonds (rather than a bond fund) should sell, realize some gains now, rather than wait until maturity.
I re-read the article and it all sounds so quaint and innocent –
“The 10 year Treasury yield almost dipped below 1% at the time of writing and I fully expect it to go below at some point this year. “
Little did I realize how low, and for how long… Let’s look at the 10 year yield.
I’ve highlighted the publication date where the 10 year closed with a yield of 1.01%. Since that date it’s been pretty much well under 1% and is only now starting to crawl back to around 1%.
So what does this mean?
Calling the bottom of the interest rate market (and top of the bond market) has been an impossible task over the last decade, and I wrote about the difficulty in Why Treasury STRIPs Have No Place In Your Portfolio and Four Reasons You Should Not Be Trading Treasury STRIPs. But this movement in March was so significant that it seemed to me worth speculating on whether that was a good time to sell if you held actual long bonds.
The answer was that I was a little early and did not call the bottom.
It may also be the case that things can fall a lot further.
However, I don’t think it was a bad article at all. If you are holding 30 year STRIPs then they will have increased massively in value. See the chart below that shows a long bond ETF that follows long STRIPs. I’ve highlighted the publication date of my article.
Maybe I didn’t catch the top of the market, but it was a pretty good time to cash-in. You can also see the dramatic change in trading volume as investors used this asset class as a ‘flight to quality’. Long Treausuries again providing their worth as solid left-tail-risk protection for your equities.
I’m gonna give this article a decent B+ Grade.
This blog will always extoll the virtues of investing for the long-term, staying the course, not holding excessive cash and staying invested. But in extreme market volatility there are opportunities for excess returns if you are brave.
Author Bio: I started actuary on FIRE as I did not see any actuaries taking a prominent role in the personal finance area and wanted to remedy a shortage of actuary jokes and write for those that appreciate rigor with fancy charts. In my regular day job I advise corporate US on investment and retirement strategies. I’m a qualified actuary, investment adviser and have a PhD in mathematics and reserve the right to have the occasional math post.