Ds, Bs … As? Grading Your 2015 Investment Performance

How would you grade your investment performance in 2015?

It may be that the first thought that comes to mind is “I just barely beat the S&P 500 so an A-.” Or, “I was a bit down for the year overall because of my weighting in so and so sector therefore a C.” But at Iron Gate we think that a better way to assess your performance is to assess the health of your overall approach to the markets.


Because occasionally chance can affect our performance. For good or ill. Sometimes even over the course of a year. But over the course of managing your portfolio for a few years, and certainly over the course of a decade and beyond, chance has almost no bearing on performance.

Given time, a sound, disciplined and strategically forward thinking approach smooths out the bumps and dips of chance and provides the fuel for solid performance.

So as you look back on this past year, consider your overall performance, but more importantly consider how you or your money manager reacted to the biggest challenges of the year, as well as the tactical and long term decisions.

How did you manage allocation? What were your considerations for entry or exit on positions? Which sectors did you overweight, and especially why? What factors of market dynamics did you focus on the most and how did that affect your portfolio? What impact did emotion have on your decision making? And so on.

In this article I give you three of the most important factors you should grade yourself against to come up with an overall grade on your approach to the markets for 2015.


What did you do during the volatility of the market we encountered?

This year we experienced something we haven’t experienced since 2011 . . . volatility! The widely followed Volatility Index (VIX), a.k.a. market fear gauge, was at one point at a hitting a level we haven’t seen since the 2008 financial crisis! (Now that’s fear!)
You can see below a chart of the VIX (on the top) and the S&P 500 (on the bottom). As the market sold off after August volatility spiked past 40.

vix article with highlights

As this volatility occurred, how did you react? Did you . . . (remember, honest assessments only!)

  • Start buying stocks that were on your wish list?
  • Take advantage of option premium by selling options?
  • Panic and sell thinking 2008 was on its way back? (There were certainly plenty of bearish individuals all over T.V.)
  • Lose too much money because you didn’t realize how much you actually had at risk?

Did you tighten stop losses on your stocks only be stopped out and see the market rally? (Don’t get me started on stop losses!)

If you did handle the volatility appropriately, excellent work! There were many opportunities that presented themselves, especially in the options market. Selling puts, covered calls, verticals and iron condors were strategies that could have worked well for any investor.

If you didn’t handle the volatility appropriately you either need to make adjustments to how you manage your money or you need to find someone that can guide you through the turmoil and fear.


Did you prepare your portfolio for rising interest rates?

We’ve been talking about interest rates for well over a year. The media for much longer than that. Everyone has known the Fed would, at some point raise interest rates. As they did we knew that it may have an impact on portfolios.

We even created an entire educational article analyzing the issue. We’ve also been positioning client accounts to prepare for interest rates moving higher. A simple 60% stocks/40% bonds model portfolio that some academic created may not be the best for you. If you’ve been watching the bond market you will know why.

If you have positioned your portfolio by reducing bond exposure or potentially shorting areas of the bond market, job well done! If you or your advisor did nothing to prepare, then consider what you could have done better.


How did you handle your investing from a psychological standpoint?

As mentioned above, 2015 was a volatile year for the market. Performance and the actions you took investing are only one aspect to review. One of the other questions you should ask is psychological in nature.

When volatility increases in the markets, investing and trading can wear people down emotionally. Some may lose sleep, others can’t eat, and some become so stressed they can’t even open the statement from their brokerage!

However, some handle volatility just fine, they actually thrive in it. They are calm and know what to do and when to do it.

The important question that everyone needs to ask themselves comes down to this . . . did you do anything you regret as a result of being scared, nervous, or flat out fear?

After decades in the market and interacting with thousands of investors, there is no question that the psychological make up, how people are hard wired, is the biggest limiting factor to people accomplishing their goals.

The graph below shows a 20 year period of asset returns and includes the “Average Investor” as one of those asset classes. You can see, highlighted in red, how poorly the average investor did through that 20 year period. They barely outperformed inflation! That is a result of making decisions at the wrong times for the wrong reasons.

average investor returns
Source: DALBAR via Forbes

Did you align your investment portfolio with your long term financial goals?

The biggest question, regardless of one year returns on your portfolio, is quite simple. Are you on a path to accomplish your financial goals?

If this year was a bad year for you investing, that may be okay. One year does not derail long term investing goals. However, when you have year after year of subpar gains or maybe even losses then it might just derail your plans.

If you don’t know exactly where you are in the path to accomplish your financial goals, whatever those might be, then there may be a problem. If you don’t know what impact your investment results have on you accomplishing those goals . . . then there is a problem.

Using some software, we provide clients with a “confidence zone.” This is essentially where you are on the path to accomplishing whatever investing goal you may have (a new house, retirement, a condo in Hawaii, your child’s college education . . . whatever). It then gives you a probability that you are going to accomplish it. If you’re unclear where you are on the path, certainly we can help.

moneyguide pro

Source: MoneyGuide Pro

So how did you do?

Now that you you’ve had a chance to grade yourself against some of the most important investment considerations of this past year, what were the results? Did you bring home a solid report card? Sometimes a single year can loom large in your mind as you look back on it. You can feel down because you under-performed the market by a point, or feel thrilled that you edged out the market.

Remember that in the long run the smarter thing to asses is whether you adjusted to the trends appropriately, you managed your emotions and the psychology of the ups and downs, and if you have aligned your current approach to your long term goals.

Smart investing requires doing everything possible to make chance irrelevant in your performance and ensure that sound decision making drives long term performance.

As you look back on the year, we hope it has been prosperous. But even more importantly we hope you’ve applied sound investing principles for the long term, and have taken the chance to learn in those cases where you didn’t.