One of our advisors came to see me this weekend because the advisor was thinking about what happened in the markets in 2025, as well as the past two years, and was wondering what sub-lessons he/she could learn from the markets.
First of all, I think this is good practice. You got to know where we are now, what has happened in a very short term (1 year), in a longer period of time (5 years) and over an even longer period of time (20 years).
I would always say that what is easy about advising the investment part of wealth management is easier because the real lesson we want clients or potential clients to know is always green because there are just a few critical things and they happen over and over again. This means that if you spend/invest enough effort to really understand it, gather your thoughts and structure your answers, it will be part of your advice briefcase for a long time.
The hardest part is learning the right lessons, instead of being misled by recency bias, sunk cost fallacy and poor market interpretations. Before you can advise others, you have to deal with it yourself, but the advantage is that if you can bridge that gap, you are in good hands.
If I can list one green thing that the advisor can remind clients of, it would be that how easily we can all underestimate the challenge of staying invested. This is even more the case if your strategy is similar to what we advocate, namely investing in a systematic portfolio with a strategic allocation.
This is difficult because the market has its own way of making you realize when things aren’t working.
We all like to do the easy thing and look at the returns of the last 3 months, 1 year, 5 years or even 30 years and conclude that I should invest more in X and not Y.
What’s less mentioned is that the path to wealth if you invest in X may not be as smooth as you think.
First, the data tells you what happened in the past. Even the long, long past and that helps validate things.
But secondly, you have to live the now and now there will be constant mental cues of how different or similar your path will be compared to previous investors.
I could use a few different funds, ETFs or indexes as a case study, but the most common that comes to mind is the performance of a S&P500 ETF (SPY) against the Avantis International Small Cap Value ETF (AVDV). SPY is 100% US large-cap stocks, while AVDV is a systematically active strategy that searches 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 ones.
I admit that they are quite different, and that most investors would not invest in international markets if they were to study regional performance over the past fifteen years. And most wouldn’t even dare investing in smaller companies if they looked at the past fifteen years of data.
But if someone were to invest in something like AVDV in 2020, their performance after 5 years, against their better judgement, would look like this:
The green line is SPY’s total return (including dividends), while the blue is AVDV. After five years, the difference in cumulative (total) performance is 28%. I know most of us measured on an annual basis, so that’s 5% per year
That’s brutal.
I think more people would sell out because:
- They have no investment philosophy.
- Or their philosophy is: “It should perform as well as it has over the past x years”
- Their friend’s performance is good, while their performance was bad (in their own minds)
- Completely forgot how long they want to invest.
There’s a good argument because if you look at the chart, there’s never been any point in the last five years where performance has come close.
I think investors often forget that they may not be investing for five years, but they may be investing for twenty years or more (you may not agree with this because you are using a more tactical or weirder, no-what-you-call-it strategy)
Here is the approximate performance if you sell out in late 2024/early 2025:
Both SPY and AVDV fell during the April 2025 period, you know, but I wonder how many people would expect this kind of performance from a 1,500-stock fund that has been underperforming for so long.
That’s a 26.5% difference in performance, and keep in mind that the SPY is in double digits.
What is difficult for investors who are new, but also new to financing investing like me, is understanding: How can a fund catch up after performing so poorly?
And this is how.
Something is too neglected for too long, becomes too cheap, and you have a systematic strategy that just happens to succeed in harvesting it.
I have layered AVDV’s performance since its founding in 2020 and what it looks like today:
If their performance is close, it means that their performance has been the same since the beginning. But the path is just so, so different.
And a sub-lesson would be: can you trust short-term historical performance?
I think just as difficult to understand as the path to wealth is how a fund earns its returns:
If you’re curious about AVDV’s top 10 holdings right now, these are:
The top 10 stocks in a 1,500-stock fund would be the best performers, and you see so many commodity companies.
I think materials make up a larger share of international small caps, but I’m pretty sure it’s not by much. The materials sector has actually grown because of what has happened since the liberation.
Fifteen years of information technology and semiconductor achievements have changed the way people look at materials, energy and perhaps even consumer goods.
And what is also difficult is how these companies can ever deliver good performance.
Epilogue
But Kyith, if AVDV’s performance is the same after 5 years, why bother and just invest in the SPY?
I could mention a few more examples to tell the same story, but I felt like you would be more invested in this case study than any other. I also didn’t have the mental bandwidth to think too much.
What I want to convey is how difficult it is for us to buy and hold a strategic and systematic portfolio and do nothing.
You can invest in something else, and that lesson would still apply because:
- The path to returns for different regions, sectors and strategies over 20/30 years is so different. They may arrive at fairly similar places but follow different paths.
- You would have to mentally deal with underachievement on something.
- You would mentally be faced with a long duration of absolute performance that goes nowhere.
The value of investment advice lies not only in choosing the right strategy and investment implementation, but also in helping you stay on the horse as you ride toward your financial goal.
To get those returns, you need to invest in the first place when the returns show up.
But it’s also mentally challenging for you to accept that you can be thrown off your horse so easily.
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You can read more about my thoughts on Interactive Brokers in this Interactive Brokers Deep Dive series, starting with how to easily create and fund your Interactive Brokers account.
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Kyith worked as an IT Operations Engineer from 2004 to 2019. He currently works as a Senior Solutions Specialist at Insurance Start-up Havend. All opinions expressed on Investment Moats are his own and do not represent the views of Providend.
You can view Kyith’s current portfolio herewho uses his Free Google Stock Portfolio Tracker.
His favorite investment broker is Interactive real estate agentsallowing him to invest in securities from various stock exchanges around the world, at very low commission rates, without custody fees, near spot currency rates.
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