Portfolios & Back Pain

Have you ever had back trouble? Boy can it be a pain in the ### (pun intended). Recovery is usually possible by seeking – and taking – proper advice and treatment. Believe it or not, there is a way to relate the recovery process from back pain to the recovery and durability of investment portfolios. Stay with me here!

I will credit my excellent physical therapist, who knows very well my profession as a CFP®, for coming up with the concept. He said to me, “like your advice about my 401k allocation, the physical strength work a person does for years can make recovery from back trouble much swifter and even easier.” Hooray! While the recovery process for a person’s back can take several weeks to several months, the recovery process for properly positioned investment portfolios has been actively taking place for over 12 months and could continue over the life of a portfolio.

Here are a few numbers:

  • A good number of portfolios we manage were up anywhere from 30% to 40% to 55%+ over the 12 months ending March & April 2021.
  • In general and conservative terms, these portfolios are up a further 3% to 4%+ in the past 2 months.
  • This performance is in large part due to the 20%+ downdraft that portfolios experienced in 1st quarter 2020 at the dawn of the coronavirus shutdowns. The subsequent 14-month recovery has led to exaggerated performance on the upside.
  • The out-performance on the upside in 2021 is also due to the overweight of small-company and value stocks that is central to the Dimensional Funds philosophy utilized by these portfolios. Small company stocks* were up over 2 TIMES that of large company stocks* in the 1st quarter of 2021. While that outperformance has slowed, small company stocks still remain higher by nearly 5% year-to-date than large companies.
  • The difference in performance of value stocks versus growth* has been even greater with the Nasdaq (growth) stock universe only recently picking up steam after being nearly flat in the 1st quarter of 2021 with value far outpacing this performance year-to-date.

For those who had an already-established asset allocation, capable of rebalancing or by taking advice and simply staying invested during the early 2020 downdraft, these portfolios recovered – and then had the strength to recover far, far more than they declined.

For my physical therapist friend, he related the market’s decline and ability to recover to a person who was already strong and in-shape and who experiences a set-back and by taking proper advice and treatment is able to recover more easily and possibly become even stronger.

Performance is only part of successful investing. Other important elements are keeping an eye on inflation, understanding taxes, and holding ample levels of cash. Managing all of these elements together can make anyone’s back feel better!

*Small-cap as measured by the Russell 2000 index; large-cap as measured by S&P 500; growth represented by Nasdaq index, Russell 3000 Growth; value by Russell 3000 Value.

Note: Past performance is no guarantee of future results.

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