Fund Managers Just Had Their Worst Quarter Ever, and I Had My Best -- Here's How I Did It

Image source: Flickr user www.vpsi.org. 

The stock market always exhibits some degree of volatility, but the first quarter of 2016 was truly something special.

Fund managers' epic struggle
After all three major U.S. indexes lost more than 10% of their value to begin the year, they all came roaring back during the second half of February and entirety of March. By the end of Q1, the broad-based S&P 500 (^GSPC -0.88%), which is arguably the most all-encompassing measure of U.S. economic and stock market health, had actually risen by 0.8%. This isn't exactly a gain to write home about, but it marked the biggest resurgence investors had witnessed within a single quarter in decades.

However, for active hedge fund managers, the first quarter was a veritable nightmare with less than one-in-five outperforming the S&P 500. According to CNBC, this represents active fund managers' worst performance ever -- or at least as far as the data goes back, which is to 1998. Core fund managers performed the "best", with roughly 29% beating the S&P 500. However, only 19.6% of value money managers beat the S&P 500 (which is surprising, considering how minimally the S&P 500 rose by quarter's end), and growth fund managers really stunk it up, with just 6% outperforming the S&P 500's return.

CNBC suggested the tendency of stocks to all move in the same direction at once, as well as the tendency of fund managers to own similar stocks, played a key role in their clear underperformance in Q1.

Image source: Pixabay.

For weeks, all I've been hearing on the financial news networks is what a difficult market this currently is for investors. But it seems every time I looked at my portfolio it was in the green in Q1. In fact, my personal portfolio logged its single best quarterly performance in the approximately 18 years I've been an investor.

How'd I do it? I simply followed two key strategies.

Two strategies I used to beat the market in Q1
First, I did veritably nothing.

Through the entirety of the first quarter I made just two trades. I added slightly to an existing position in one company, and I got rid of a short position in Tesla Motors -- and not a moment too soon, may I add, as the stock has gone up in a near straight line ever since. Aside from these trades, I just sat back, relaxed, and hung onto my positions.

On the other side of the aisle, hedge fund managers were scrambling to find value or growth stocks to invest in that would return a quick buck for their shareholders. Unfortunately for these fund managers, the S&P 500's extreme volatility made cashing in on short-term moves difficult.

The lesson here is pretty simple, and it was on display for the entire quarter: timing short-term moves in the stock market with any consistency just isn't possible. True, timing the market may allow you to miss some of the market's worst days, but I'd be willing to bet you'll also be on the sidelines when some of the most voracious rallies occur, too.

To emphasize this, J.P. Morgan Asset Management conducted a study, using data from Lipper, of the S&P 500 between Dec. 31, 1993 and Dec. 31, 2013. The assumption tested is what would happen to investor returns if they held throughout the entirety of the 20-year period compared to missing, say, the 10, 20, 30, 40, 50, or 60 best trading days over this roughly 5,000-trading-day period. The results were pretty staggering.

Chart by author. Data source: J.P. Morgan Asset Management, using data from Lipper.

Individuals who held onto the S&P 500 (presumably via a tracking index) over the entire 20-year period without selling earned a return of 483%. Mind you, this return was earned despite the S&P 500 falling more than 50% during two monstrous recessions (the dot-com bubble and the Great Recession). By comparison, missing just the 10 top performances of the S&P 500 reduced an investor's gains by well over half to 191%. If you missed the 30 best days, you turned only a marginal profit and lost real money to the inflation rate.

In easy to understand terms, my portfolio bucked the trend simply because I bought and held and didn't panic -- nothing more.

Image source: Pixabay.

Secondly, I reassessed my investment thesis in each company once every month. By this I mean I went through my portfolio and analyzed each stock one by one to determine if the reasons I bought a company (or short-sold it) still made sense. With the exception of Tesla Motors in mid-February, which I deemed to have brightening prospects based on its then price of $154 per share, I didn't see any reason to change my game plan.

If there's a core theme or two to the above strategies, it's that I remained committed to my buy-and-hold investment thesis, and I didn't allow my emotions or a good or bad trading day to influence me to make a rash trading decision. You'll note this is a pretty simple strategy that any investor, of any experience level, can employ on their own.

Although I know not every quarter can be as good as the first quarter was for me, I feel pretty confident that I'll do just fine over the long run, and would encourage you to stick to your long-term convictions the next time a stock market correction strikes.