A Peek Into God’s Portfolio
What if God were a portfolio manager?
What would his portfolio look like — and what kind of returns would the Almighty be working with?
That’s a pretty amusing thought experiment posed by Wes Gray over at Alpha Architect.
The takeaway from Gray: “Even God would get fired as an active investor.”
Let’s unpack what that means for a minute…
Creating the “Perfect” Portfolio
To figure out what “God’s portfolio” might look like, Gray simulated a portfolio for an omnipotent investor who knew ahead of time which stocks were going to be long-term winners and which were going to be long-term losers. And he looked at the very long-term time frame between 1926 and 2016.
In this simulation, our heavenly portfolio manager knows beforehand which stocks are going to go up – and he only owns winners.
By design, this is impossible to achieve in real life.
It shouldn’t come as a surprise that the simulation got great results.
God’s portfolio, which is made up of the stocks with the best five-year returns, compounds at about 29% a year. That’s an absolutely massive return over a 90-year stretch.
To put that into context, if you put $100 into God’s portfolio at the start of 1926, you’d end up with about $897.6 billion at the end of 2016!
What’s more surprising is that it has some awful years too.
In 2008, the portfolio lost almost 41% at its worst – and took about two years to recover.
Similar drops happened in 2000, 1987 and other down years for the stock market.
Even if you know ahead of time which stocks are going to be the very best performers for the next five years, it’s not a straight path to profits. There are plenty of deep drawdowns along the way.
It’s not hard to imagine any investor with unlucky timing who bought into this omniscient strategy in 2007 thinking that God’s a lousy portfolio manager (or that he’s lost his touch), even though new highs were just on the other side of that ugly drop.
What Does All of This Mean for You?
The idea that you could have an impossibly stellar strategy in the long term that looks terrible in the short term is really important here.
Too often, folks who think of themselves as long-term investors get lured into evaluating those investments on a super-short-term basis.
If your investment horizon is a lifetime, it’s crazy to judge how your portfolio is doing on a daily or even weekly time frame.
Likewise, it’s important to understand that even incredible strategies can underperform — sometimes for much longer than we expect.
The worst thing you can do is dump a long-term strategy because of short-term underperformance.
If an investment or strategy is underperforming, a more important metric is whether that lag is similar to that strategy’s other lagging periods from the past. And if it’s significantly different, has something changed that should make you rethink your investment?
In the age of the 24/7 news cycle, investors’ attention spans are getting shorter — and that’s probably a very bad thing for their wealth.
As it turns out, patience is still a virtue for investors. And it doesn’t take divine intervention to see why.
For Technology Profits Daily,
Chief Quantitative Expert, Technology Profits Daily