This post details another learning opportunity for investors. Learn from my mistakes, so you don’t repeat them. It was late Summer 2020. We were several months into the Covid-19 pandemic and as I reviewed fund performance for the year, I couldn’t help but notice the wide disparity of returns between asset classes in the US stock market. The most glaring gap was the difference between large-cap and small/mid cap stock portfolios. International was lagging. I was accustomed to that and it seemed logical that a global pandemic would affect emerging markets harder than developed ones. Russell 2000 index was down just over 5% YTD, Russell mid-cap down 1.5% YTD and S&P 500 growth index up 23% YTD. A prevailing thesis held that the strong performance of large US tech companies would continue. There was to be no slowing down of the Top Tech Dawgs: Facebook, Google, Amazon, Apple. See the performance in those different asset classes through August 2020 (showing iShares ETF index funds):
Small Cap performance: January – August 2020
Mid cap performance: January – August 2020
Large Cap growth performance: January – August 2020
With conviction that large cap tech dominance would continue, on August 24th, I moved approximately 50k out of small and mid-cap index funds into large cap growth. This seemed the smart money move at the time. The Covid-19 pandemic ravaged the country and many small businesses were unable to adapt as well as larger ones to a remote work environment among other challenges. The thesis was that Big Tech would continue getting bigger over the coming years. This may prove accurate over the next decade, but it did not hold for the remainder of 2020. Small/Mid cap stocks came roaring back in the last 4 months of the year to outpace the S&P 500 performance by year end.
What did this Rash Cash move cost me? See the charts for the last 1/3rd of the year and math below (performance data from iShares index ETFs):
Small cap performance: 25.3% return (September – December 2020)
Mid cap performance: 17.4% return (September – December 2020)
Large cap growth performance: 7.5% return (September – December 2020)
Applying the above percentage returns to my move of 50K (half in each small cap and mid cap) all to large cap growth.
(small cap) 25k * 1.253 = $31,325
(mid cap) 25k * 1.174 = $29,350 – what I could have experienced
Vs.
(large cap growth) 50k * 1.075 = $53,750 – what I experienced
Opportunity cost = ($31,325 + $29,350) – $53, 750 = $6,925
To miss out on approximately 7k of gains in four months is a major bummer. Imagine if the dollars invested were significantly higher. In retrospect I would not have made that trade decision at that time. I do, however, appreciate the opportunity to re-learn a lesson. Trying to outsmart the market is a fool’s errand. At the time I reasoned that I wasn’t making a drastic move. I traded US stock funds (rotating out of assets small and mid-cap assets that had underperformed not just in 2020 but for several years), when the thesis for the future return prospects seemed sound. And yet, I was wrong. Maybe the timing was wrong and the thesis will prove out over a longer period. Time will tell. I performed this 2020 forensic investment study on my personal finances for our benefit. I need to be reminded of this lesson periodically it seems. There is so much noise around individual investments. We see news stories of people making great returns over short periods of time with undiversified investment strategies like single stocks or Bitcoin (significant winners in 2020). The temptation is to jump in, but you must remember that the move has already occurred and while that performance could continue, I would argue it is less likely the larger a company or asset grows.
I hope you found this account helpful and always remember don’t be Rash with your Cash.
Read about what came out of this lesson learned: FI Chronicle family financial policy statement.