Here's Why Your Portfolio Didn't Beat "the Market" in 2018

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Investing is not a game, but it is important to keep score. The question is significantly more nuanced than the simple, "Did my stock picks increase in value over a given time period?" Especially last year, when a majority of stocks were decliners -- even after factoring in dividends -- it's important to put your results in the proper context.

So in this "What's Up, Bro?" segment from Motley Fool Answers, hosts Alison Southwick and Robert Brokamp run through the benchmark data for 2018 and explain why it was particularly hard for most investors to beat the S&P 500's unimpressive result. The duo also get down to basics by defining some fundamentals, and they reveal the best- and worst-performing U.S. stocks, sectors, and foreign markets from the past year.

A full transcript follows the video.

This video was recorded on Jan. 8, 2019.

Alison Southwick: So Bro, what's up?

Robert Brokamp: Well, Alison, very soon you'll start receiving those year-end account statements from your brokerages, your 401(k), all your investment accounts (if you haven't already started to receive those). You'll get an idea of how your portfolio fared in 2018 and you'll want to know how you did on an absolute basis because obviously how much your portfolio grows, or doesn't grow, will have an impact on when you can accomplish your financial goals: when you can retire, how much you're going to have for the kids' college education, and all that type of stuff.

But you also want to know how you did on a relative basis compared to relevant benchmarks so you can understand why your portfolio did what it did and if you need to make any changes, so I figured we'd spend this time doing a bit of an investment autopsy on 2018 so people could understand what did well or not as well. Look at their own returns and see how they compare.

Let's start with the major indices, and by the way, all the numbers I'm going to give are total returns, so that's the price as well as the dividend that's included. For 2018, the S&P 500 dropped 4.6%. While the index was down for the year, 160 stocks actually did make money, so a little bit more than two-thirds lost money. About 30% did make money. The Dow was down 3.7% and the Nasdaq was down just 1%.

Those aren't horrible losses, but I'm guessing that for most people with a diversified portfolio, they actually did worse. That's because those market indexes are market cap-weighted, which means the biggest companies have the biggest influence. Smaller companies didn't do so well.

For example, while I said the S&P 500 was down 4.6%, if you equal weighted all the companies within the S&P 500, it was actually down 7.8%. There's also an S&P 400 index of mid-cap stocks -- that was down 11.2% -- and the S&P 600 index of small-cap stocks was down 8.5%. If you look at the Russell 2000, which is a broader and more well-known index of small companies, they were down 11.1%. So the smaller your average holding was, chances are you didn't do as well.

Another factor was style, meaning growth vs. value. The S&P 500 Growth ETF, which tilts the holdings toward the more growth-oriented companies was basically flat for the year. The Value ETF was down 9.2%.

Southwick: Could you define "value" quickly?

Brokamp: Value basically is by various measures, a cheaper stock. Lower P/E, lower price-to-sales. Maybe a higher dividend yield. Something like that. So value was out of favor last year and it's been that way for a couple of years.

When you look at sector, the three top-performing sectors actually made money, but just barely. They were healthcare, utilities -- utilities, can you imagine? -- and consumer discretionary. The three worst sectors in 2018 were energy, materials, and industrials. So the manufacturing companies and the companies that are related to "stuff" like oil and things like that did not do as well.

In case you're curious about what the best-performing stocks were in the S&P 500 last year they are, in order, Advanced Micro Devices, otherwise known as AMD was up 73%, followed by Abiomed, Fortinet (not to be confused with Fortnite, because if that were a stock that would have done well), Advance Auto Parts, TripAdvisor, and (because I know a lot of Motley Fool listeners own this stock) Chipotle. Chipotle was the sixth best-performing in the S&P 500, up 46%. If you broaden beyond the S&P 500, the best-performing stock of the broader stock index was World Wrestling Entertainment up 144%.

Who knew? It's a mid-cap stock. The worst performers in the S&P 500 were Coty (COTY) down 67%, followed by L Brands, Mohawk Industries, GE (down 57%), and then Invesco. The worst performing of the broader stock market is a small-cap stock known as Cloud Peak Energy, down 91%.

Southwick: Oh! Had a rough year.

Brokamp: I know. I made that comment about how Fortinet, which is a cybersecurity company is not Fortnite. Then, of course, I had to google who owns Fortnite and I found this Quartz article. Fortnite makes $2.5 million a day. It is not publicly traded, although a lot of it is owned by a publicly traded Chinese venture capital firm. But it's owned by Epic Games, which was created by Tim Sweeney back in 1991 in his parents' basement in Maryland. He's now worth $7 billion. I thought that was an interesting little story, so that's a resolution for 2019.

Southwick: Invent a game that takes over.

Brokamp: That makes $2.5 million a day thanks to people like my son. That's all U.S. stuff. Then there's international stocks. The overall non-U.S. stock market dropped more than 14%, but that's a big bowl of stocks. There's a lot of differences there. Emerging markets, in general, tended to do worse than developed markets. The best countries -- take a guess -- Ukraine up 80%, Macedonia up 30%...

Southwick: We just got a postcard from Ukraine.

Brokamp: We did?

Southwick: Yes. I'll talk about it on the next show.

Brokamp: I wonder if they have any stock recommendations? And Qatar, at 21%. The worst -- Venezuela's stock market is down 95%. Read any article about what's going on in Venezuela, it is a world of pain. Huge inflation and your stock market's down 95%. Argentina down 50% and Turkey down 43%. That gives you an idea of what happened across the world.

Whenever you look at your investments, I think you also should evaluate the people who are picking your investments. That could be a financial advisor. It could be a mutual fund manager. It could be that wealth manager you see in the mirror every morning -- but someone is making those investment decisions and I think understanding how your portfolio performed, you should also understand who's picking those things and whether that's where a change should be made.

It's easy with mutual funds because you can just use Morningstar. If you have a large-cap growth fund, you go to Morningstar, you enter its ticker, you click on performance, and you scroll down to the category rating, and if its category is 10, that means it's performed in the top 10% of funds, so you're doing pretty well.

It's harder with a financial advisor, because not only, generally, are they managing your portfolio, but they're ideally providing some financial planning advice, tax advice, retirement planning advice, but you certainly should still keep them accountable. I think you should choose a collection of indices or benchmarks.

I would choose a total market type of index like the S&P 1500 or the Russell 3000 to compare a stock portfolio to. But I also like benchmarking people to some sort of target retirement fund; so, if you plan on retiring in 2040, I think using Vanguard's 2040 Fund is a good comparison to what your financial advisor is doing for you or what you are doing for yourself.

Southwick: We never used a financial advisor before, but is this the time of year when if you haven't heard from your financial advisor you call them up and say, "Hey, what's up? We haven't talked in a while." Is that reasonable?

Brokamp: Completely reasonable and completely reasonable to ask them to explain the returns and explain what they see as a relevant benchmark to what they're doing. We always compare ourselves to the S&P 500, but it's not really a fair benchmark unless you are comparing the performance of U.S. large-cap stocks, which really comes to the Foolish bottom line, here, and that is we talk about beating the market and it's usually represented by that S&P 500.

But the S&P 500 is made up of U.S. large caps and it's getting more growth oriented. All of those things did well this year, so if you had a reasonably diversified portfolio, you trailed the S&P 500. But that's OK. In years where U.S. large caps trail everything else and then you underperform the market, then you probably have more of a concern. So I wouldn't freak out if you underperformed the market this year.

I would choose a more relevant benchmark -- more like a total stock market index -- and give yourself, as well as your financial advisor and any mutual fund managers, at least three years for a fair comparison. But if people are not beating or keeping up with a relevant benchmark over that time period, it's time to change that.

And then I'll bring it back to the original point about financial planning and absolute returns, and that is this is a great time of year to use these year-end portfolio values, input it into a retirement calculator to see how the market's returns last year will affect your retirement goals. And if you don't feel comfortable doing that, I totally recommend going to seeing a financial planner to do it for you. I think everyone should do that at least once every five years, especially if you are within five to 10 years of retiring.