‹ View All Insights

Putting Performance in Perspective

Published by Motley Fool Wealth Management on Wed, Dec 29, 2021
Putting performance in perspective

In 1971, Hasbro's Playskool division launched figurines with rounded bottoms, which made famous the catchphrase, “Weebles wobble, but they don't fall down." Children spent hours in joyful glee, knocking them down to watch them bounce right back up!

Over the last two years, the U.S. stock market has been like one of those Weebles. With each hit—slowing economic growth, a pandemic that shut down the global economy, and a contentious presidential election—the U.S. stock market (represented by the S&P 500) bounced right back up. In fact, not only didn’t the market get trampled in 2020, it did its own trouncing—rising 18.4%. And it is on pace to be up over 20% this year.1 A pretty impressive feat!

But despite the robust market returns, there’s an interesting phenomenon when you peel back its layers.

A pretty exterior hides an ugly interior

Although the S&P 500 is up over 20% as of November 26, 2021, not every stock has done well. For example, roughly 92% of the S&P 500's stocks fell by an average of 18% sometime during 2021.2 Interestingly, the higher a company’s growth rate (NASDAQ) or smaller its size (Russell 2000), the steeper the drawdown.2

Despite Overall Market Gains, Individual Stocks Have Dropped Sharply  at Times

Index YTD return % of members with positive YTD return % of members with at least a 10% drawdown from YTD high Average member drawdown from YTD high
S&P 500 22% 79% 92% -18%
NASDAQ 20% 61% 89% -40%
Russell 2000 14% 64% 98% -36%

Source: Charles Schwab, Bloomberg, as of 11/26/21. Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly. YTD denotes year-to-date. Past performance is no guarantee of future results.

What does this underlayer of negative returns tell us? This data highlight two points:

1. Measuring performance on a short-term basis may be misleading. For example, you may pick a period where the stocks in your portfolio are firing on all cylinders. This may make you feel overly confident about their expected long-term growth trajectory. Or, you may choose a period where your stocks are out of favor and sell them at precisely the wrong time.

Take Amazon.com (AMZN)* for example. We looked at its daily stock performance from January 2011 through October 2021 and discovered several notable findings3:

  • 34% of the time, AMZN shares were 10% or more below its high of that same 128 month period
  • 308 trading days—more than one year of trading days (253 days)—AMZN was 20% or more below its high
  • Four out of the last ten calendar years (2011, 2014, 2016, 2019)—or 40% of the time—AMZN underperformed the S&P 500

In isolation, these stats may paint a picture of a poorly performing stock. But that is far from the truth. In fact, during this period from January 2011 to October 2021, Amazon’s stock increased by roughly 1,700%, or at a compounded annual growth rate of 34%.3

Lesson Learned: Evaluating performance over short periods may possibly lead to the wrong conclusions and ill-timed transactions.


Source: S&P Capital IQ

2. There’s a constant rotation that happens within the market. Some companies may be “Wall Street” darlings and perform well for extended periods, while others may have fleeting favoritism. Some riskier industries may do well in a specific economic climate but get pushed to the side when conditions shift. These market rotations are nothing new. That’s why the debates between value vs. growth or small vs. large-cap resurface every so often.

The lack of sector leadership is easily visible in the chart below. In order of best performing to worst, this chart ranks the performance of all the market sectors represented in the S&P 500 for the last 13 years through June 30, 2021.

No, your eyes are not deceiving you! Sector winners are all over the map. For example, in 2018, healthcare was the top dog, but then in 2019, it was trolling near the bottom of the chart. This year as of June 30, 2021, energy is the winner, but it's been the biggest loser according to this chart for the prior three years from 2018 to 2020.

Lesson learned: Nothing wins all the time—no company, industry, or investing style.4email-chart-novel_investor_sector

Source: novelinvestor.com. Past performance does not guarantee future results. The historical performance is meant to show changes in market trends across the different S&P 500 sectors over the past 10 years. Returns represent total annual returns (reinvestment of all distributions) and do not include fees and expenses. The investments you choose should reflect your financial goals and risk tolerances. For assistance, talk to a financial professional. All data are as of 6/30/21. 

Short term mindedness is harmful to decision-making

Extrapolating short-term results to a longer horizon often can be a recipe for failure—especially in a shifting landscape.

Consider this sports example. A football team throws just three passes in a game… and wins. Does the result mean that its quarterback is irrelevant to a long-term winning strategy? Before you answer this question, consider the landscape: the environment (a snowy, high-wind evening) and how their strengths (a solid offensive line and running attack) matched up against their opponent's.

The point is that one strategy may work well in a particular environment but not in a different one. So implementing that single-game strategy for a whole season would likely be disastrous.

Short-term thinking can be equally as harmful in investing, especially during periods of underperformance.

This year, the returns of individual stocks highlight that almost every company underperforms—by somewhere between 18% and 40% on average5—at any point in time. AMZN has… more than one-third of the time over the last decade.3 Even top-performing funds don’t always win. Studies6 show that periods of underperformance are normal.

One study, of the ten-year period ending December 31, 2013, highlights that significant gaps in performance relative to the broader market can be common, especially for one-year periods. Data in this study show that over shorter holding periods of 12 months:    

  • Most top funds—91%—fell below their respective benchmark by at least 5%
  • More than half (57%) of the funds disappointed by more than 10%
  • A quarter underperformed their benchmark by more than 15%  

Even over a medium time horizon—three years— during the 10-year period of the study from 2003 to 2013, about half of the top-tier funds (49%) underperformed by more than 3% annualized. However, each of these funds delivered long-term incremental wealth above their benchmarks.7

Putting short-term performance in perspective

People can tend to feel losses twice as much as wins.8 And recent losses often overshadow previous gains. But nearly every investor will experience periods of lower-than-expected returns at one point.

However, unlike trading—which often tries to exploit minute-by-minute or daily market inefficiencies—many buy-and-hold investors look to own companies, not for this minute, but for years.

That's why it's important to put short-term performance in perspective: Underperformance is upsetting. Yet, it is common. But near-term thinking should not dictate investment decision-making for the long haul. Instead, sticking with a time-tested process and philosophy generally delivers better overall performance.


1Through 11/26/21

2Charles Schwab, Bloomberg

3Data source: S&P Capital IQ. Findings calculated by Motley Fool Wealth Management. 


5Charles Schwab, Bloomberg, through 11/26/2021

6https://davisfunds.com/downloads/EWST.pdf, https://www.brandes.com/docs/default-source/brandes-institute/death-taxes-and-short-term-underperformance-fixed-income-funds, https://content.rwbaird.com/RWB/Content/PDF/Insights/Whitepapers/Truth-About-Top-Performing-Money-Managers.pdf

7The study looked at a group of more than 2,000 mutual funds with a 10-year track record as of December 31, 2013, and narrowed the list to 625 that outperformed their respective benchmarks by one percentage point or more, on an annualized basis, over the 10-year period. Furthermore, the study included only those that outperformed and exhibited less volatility than the market benchmark. This narrowed the list to a select 155 funds. In dollar terms, these top performers generated more than $10,000 in incremental wealth above the benchmark’s return for every $100,000 invested over the period.

8Kahneman, Daniel, and Tversky, Amos. “Prospect Theory: An Analysis of Decision Under Risk.” The Econometric Society, vol. 47, no 2, Mar. 1979, pp. 263-292.


*Certain of our Personal Portfolio strategies may hold Amazon. The mention of AMZN does not constitute a recommendation by MFWM. Rather, the discussion is solely intended to describe the up and down movement of stock prices over time.

The content in this article is provided for informational purposes only, reflects our general views on investing, and should not be relied upon as recommendations or financial planning advice. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. While we can counsel on tax efficiency and general tax considerations, MFWM does not (and is not permitted to) provide tax or legal advice. Clients who need such advice should consult tax and legal professionals. These comments may not be relied upon as personalized financial planning or tax advice.

MFWM is an SEC-registered investment advisor with a fiduciary duty that requires it to act in the best interests of clients and to place the interests of clients before its own. HOWEVER, REGISTRATION AS AN INVESTMENT ADVISOR DOES NOT IMPLY ANY LEVEL OF SKILL OR TRAINING. Access to MFWM is only available to clients pursuant to an Investment Advisory Agreement and acceptance of MFWM's Client Relationship Summary (PDF) and Brochure (PDF - 204 KB). You are encouraged to read these documents carefully. All investments involve risk and may lose money. MFWM does not guarantee the results of any of its advice or account management. Clients should be aware that their individual account results may not exactly match the performance of any of our Model Portfolios. Past performance is no guarantee of future results. Each Personal Portfolio is subject to an account minimum, which varies based on the strategies included in the portfolio. MFWM retains the right to revise or modify portfolios and strategies if it believes such modifications would be in the best interests of its clients.

MFWM, an affiliate of The Motley Fool LLC (“TMF”), is a separate legal entity, and all financial planning advice and discretionary asset management services for our clients are made independently by the financial planners and asset managers at MFWM. Neither of TMF co-founders, Tom Gardner and David Gardner, nor any other TMF analyst is involved in the investment decision-making or daily operations of MFWM. MFWM does not attempt to track any TMF services.

During discussions with our Wealth Advisors, they may provide advice with respect to 401(k) rollovers into accounts that are managed by MFWM. Such recommendations pose potential conflicts of interest in that rolling retirement savings into a MFWM managed account will generate ongoing asset-based fees for MFWM that it would not otherwise receive.