With the S&P 500 up 30% on a total return basis for the year, maybe this is not a good time to brag about returns. For that, let us wait for a more challenging year in the stock market.
This has been an amazing year in the stock market, no matter how it is measured. The S&P 500 gained close to 30%, although pessimism often reached extreme levels. The maximum drawdown was about 5%.
As reported in this blog in an article on December 23, 2021, based on the count of new all-time intraday highs or new all-time closing highs, this has been the second or third strongest year in the S&P 500 since 1942.
With the number of new all-time closing highs at 70, bragging about returns of funds, or ETFs, is pointless. Let us wait for a challenging year to do that, and maybe after a bear market, if ever.
A follower on Twitter uploaded in a DM a list of hedge funds and their performance year-to-date. It was surprising that the distribution of returns was close to those of a large number of random traders tossing a fair coin for going long (heads) or short (tails) in the SPY ETF during this year. In fact, the extremes matched well.
This simulation tells us that the returns of random traders ranged between -41% and +75.9%, with a mean of 0.06% and a standard deviation of 13.05%. About 47.4% of random traders profited, but only 1.7% made above-average buy and hold returns. Yet, some made up to 75.9% due to luck. About 3% of random traders made more than 30%.
According to the stats for random traders tossing fair coins and trading SPY ETF, making 30% or even 40% this year could be due to luck. In a year like 2021 that broke many records, maybe bragging about returns isn’t the right time.
Traders and funds are better judged not from their performance in excellent years for passive investing but from their performance during bad times, i.e., when convexity is expensive but highly desirable. The bear markets are the time to talk about performance, not 2021.
This year was a gift from central banks to investors. These gifts are rare. The market may gain 30%, or even more, again in the future during a year but not in the orderly way it was achieved this year.
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Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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