One of our advisers looked me up over the weekend because the adviser was reflecting on what transpired in the markets over 2025, but also over the last two years and wonders what are the sub-lessons he/she could learn from the markets.
Firstly, I think that is a good habitual practice. You got to know where we are today, what transpired in the very short term (1-year), in a longer time frame (5-year), and over an even longer timeframe (20-years).
I would always say what is easy about advising the investing part of wealth management is easier because the true lesson we want clients or prospect to know are evergreen because there are just some critical stuff and they occur again and again. This means that if you spend/invest enough effort to truly understand, sequence your thoughts, structured your responses, this will be part of your advise briefcase for a long time.
The more tough part is learning the right lessons instead of being fooled by recency bias, sunk cost fallacy, and poor market interpretations. Before you can advise others, you yourself have to deal with those yourself, but the upside is if you manage to cross that chasm, you are good.
If I can boil down one evergreen thing that the adviser can remind clients, it is how easily we all can underestimate the challenge to stay invested. This is more so if your strategy is like what we advocate which is to invest in a systematic portfolio with a strategic allocation.
This is difficult because the market has its own way to make you realize that things are not working.
We all like to do the easy thing by reviewing the past 3 months, 1 year, 5 years, even 30 years of return and conclude that I should invest more in X and I should not invest in Y.
What is less mentioned is the path to riches if you invest in X may not be as smooth as you think.
Firstly, the data tells you what happen in the past. Even the long, long past and that help validate things.
But secondly, you got to live it now and there will be constant mental pings of how different or similar your path will be compared to the past investors.
I could use a few different funds or ETF or index as a case study but the more common one that comes to mind is the performance of an S&P 500 ETF (SPY) against the Avantis International Small Cap Value ETF (AVDV). SPY is 100% US large cap equity, while AVDV is a systematic-active strategy that looks in non-US but developed markets for smaller capitalization companies and systematically selects the cheaper and more profitable ones over the more expensive and less profitable one.
I admit that they are kind of different, and for most investors would not invest in international markets if they studied the regional performance in the past 15 years. And most would not even venture to invest in smaller firms by looking at the data in the past 15 years.
But if someone happen to invest in something like AVDV in 2020, against their better judgement their performance after 5 years would look like this:
The green line is the total return (including dividend) performance of SPY while the blue is AVDV. At the 5 year mark the difference in cumulative (total) performance is 28%. I know most of us measured in annualized so that is 5% p.a.
That is brutal.
I think more people would sell out because:
- They have no investment philosophy.
- Or their philosophy is “it should do as well as the past x-years”
- Their friend’s performance is good while their performance sucked (in their own mind)
- Totally forgot how long they want to invest for.
There are good justifications because if you look at the chart never did any point in the last 5 years did the performance comes close.
I do think investors frequently forget that they might not be investing for 5 years but perhaps 20 years or more (you may disagree with this because you run a more tactical or weird dunno-what-you-call-it strategy)
Here is the performance roughly if you sell out near the end of 2024/start of 2025:
Both SPY and AVDV dipped during the April 2025 you-know-what, but I wonder how many would expect this kind of performance from a 1500-stock fund that has been underperforming for so so so long.
That is a 26.5% difference in performance, and bare in mind the SPY is double digit.
What is difficult for investors that are new, but also new to fund investing like myself is to fathom: How can a fund catch up in performance after doing so badly?
And this is how.
Something gets too neglected, for too long, become too cheap, and you have a systematic strategy that happens to be able to harvest it.
I layered the performance of AVDV since inception in 2020 and how it looks today:
If their performance is close, that means since inception their performance is the same. But the path is just so, so different.
And a sub-lesson would be could you trust near term historical performance?
i think just as hard to fathom as the path to riches is how does a fund earns its returns:
If you are curious about the top 10 holdings of AVDV currently it is this:
The top 10 stocks in a 1500-security fund would be the top performers and you can see so so so many resource companies.
I think materials is a larger proportion of international small caps but I am pretty sure they are not THAT much. The materials sector basically grew because of what transpired since liberation day.
15-years of information technology and semi-conductor performance have made folks look at materials, energy, perhaps consumer staples in a different way.
And what is also tough is how these companies can ever had good performance.
Epilogue
But Kyith if AVDV’s performance after 5 years is the same, then why do we bother with it and just invest in the SPY?
I could bring up another pair of examples to tell the same story but I felt that you would be more invested in this case study versus another one. I also didn’t have the mental bandwidth to think too much.
What I wish to convey is how difficult it is for us to buy-and-hold a strategic and systematic portfolio and don’t do anything.
You can be investing in something else, and that lesson would still apply because:
- The path to returns for different regions, sectors, strategies over 20/30-years is so different. They can arrive at pretty similar places but taking different paths.
- You would have to mentally deal with underperformance against something.
- You would have to mentally deal with a long duration of absolute performance not going anywhere.
The value of investment advise is not just in picking the right strategy, right investment implementation but to help you stay on the horse as you ride to your financial goal.
To harvest that return, you got to be invested in the first place when the return appears.
But it is also mentally challenging for you to accept that it can so easy for you to be thrown off the horse.
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Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.
Readers also follow Kyith to learn how to plan well for Financial Security and Financial Independence.
Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.
You can view Kyith’s current portfolio here, which uses his Free Google Stock Portfolio Tracker.
His investment broker of choice is Interactive Brokers, which allows him to invest in securities from different exchanges all over the world, at very low commission rates, without custodian fees, near spot currency rates.
You can read more about Kyith here.
