One’s perspective in life is important, and so are one’s expectations. Some say “life is about expectations” meaning if your expectations are too high you are bound to be disappointed and if your expectations are reasonable you might end up pleasantly surprised. What are your investing expectations? Do you want to beat the market? If so, over what time period (one month, one year, 10 years)?

I like to tell stories with the benefit of hindsight, so let’s start by comparing a portfolio’s performance to the S&P 500. I doubt one would be happy about this period (assuming you expect to beat the market on a yearly basis).

Select Years MCM.png — Returns

A “zoomed-in” view of performance vs. S&P 500 for select years since 2012.

The following portfolio has underperformed in six of the seven years selected. This portfolio sucks, right? It may… but let’s zoom-out (which will help us change our perspective). Below is the entire performance for 11 years from Jan. 2010 through Dec. 2020.

The ‘zoomed-out” view seems a little better, but man, there is still a lot red… I’m not sure that I like the idea of holding this portfolio. There are a lot of ups and downs and two periods (2012 - 2014 and 2017 - 2020) of underperformance. How do you think this portfolio performs for the entire 11 years? Let’s zoom-out again!

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Finally, we get the complete view. The light blue portfolio has significantly outperformed the benchmark over the full period (despite underperforming on a yearly basis six out of 11 years). The light blue portfolio has averaged roughly 17% annual returns! The light blue portfolio has turned $10k into roughly $61k in 11 years… but the light blue portfolio only felt “fun” or “easy” in two of 11 years (2010 and 2016) less than 20% of the time.

At this point, you have probably guessed that the light blue portfolio is my portfolio (it’s not fair to pick on anyone else’s portfolio). When I “zoom-out” it feels like a pretty solid track record, but for most people, I think the performance above is a rare form of torture - especially in 2014 and 2020. Welcome to value investing friends!