Author Topic: Thinking is painful  (Read 1487 times)

CrankAddict

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Thinking is painful
« on: February 15, 2019, 12:16:09 PM »
Normally I have a monthly transfer to my 401k that goes into VTSAX.  Up or down it just happens and I don't think about it.  But in mid January when I transferred the larger, annual "profit sharing" component I stupidly put it into VMFXX.  I did this because of all the turbulence in the market in the 2 months prior.  Things had just climbed from $58 to $66 in a month and I suppose I was expecting a correction.  So I waited.  And I'm still waiting.  Now every day I'm stressed about when to jump back in.  And of course things have continued to go up.  Part of me is 100% certain that the minute I buy the market will correct 10% down.  The other part of me knows I've never successfully timed anything.  So why think I can do it now?  OR, maybe that just means I'm due?  LOL  The odd thing is that I literally hate gambling.  If you gave me $20 I'd just as soon drop it in a trash can than play black jack or slots.  Zero appeal whatsoever.  But somehow, this damn market stuff keeps teasing me into thinking there is something there to be figured out.  Some way to make it not just a casino play.  Ugh...

So the only point of this post really is to confirm the peace of mind (let alone the almost certain financial benefits) that automated, thought-free investing provides as compared to any of this "trading" nonsense.  Learn from my mistake, stick to the plan, don't ad lib!

P.S. When do you guys think I should buy in? (kidding)

Mississippi Mudstache

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Re: Thinking is painful
« Reply #1 on: February 15, 2019, 12:33:26 PM »
You said you were kidding, but let's be clear: The time to buy in is as soon as you have the money.

All of us have been through what you are going through right now, but the sooner you get over short-term market fluctuations, the better off you'll be forevermore. I've been joking a bit in another thread about losing $1600 in market growth just by being out of the market for two weeks during a 401k rollover. But you know what? I haven't lost a wink of sleep over it, because the market gyrations are beyond my control. I feel much worse about a $200 traffic ticket I got a couple weeks ago, because I know damn well that could have been avoided. It makes sense to feel pain regarding such things, because it will help me make better decisions (to not speed) in the future. You cannot control or predict the market, so stop caring when it moves against you, because you're in it for the long haul.

Rob_bob

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Re: Thinking is painful
« Reply #2 on: February 15, 2019, 12:51:49 PM »
Do you need this money short term?  Because you are thinking of it in a short term manner.  Think of it 20 years from now, is the few $$ you have lost by waiting to put it to work going to matter 20 years from now?

CrankAddict

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Re: Thinking is painful
« Reply #3 on: February 15, 2019, 01:01:46 PM »
Despite my recent actions, I fully believe that if the question is "should I buy last week, this week, or next week?" the answer is always "buy asafp".  What I'm still trying to work through, however, is whether having a cash (VMFXX) component in the 401k makes sense 1) for general asset diversification and 2) for satisfying buying opportunities (good deals during market drops, basically).  Previously I never had any cash, I was approx 80% stocks, 20% bonds.  Currently I'm 80% stocks, 14% bonds, 6% cash.  So the lingering question is whether I'm best off immediately getting all 6% back into a non-cash asset, or if there's some merit in having a small cash component, perhaps 3% total.  None of this will be drawn for a minimum of 10 years, so this is all geared towards a fairly long-term best approach.
« Last Edit: February 15, 2019, 01:04:28 PM by CrankAddict »

Mississippi Mudstache

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Re: Thinking is painful
« Reply #4 on: February 15, 2019, 01:12:12 PM »
Now you're just trying to justify your decision to hold off on investing the money January and then promptly seeing double-digit growth in the month that followed. Stop doing that. Decide on a portfolio allocation and stick with it!

CrankAddict

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Re: Thinking is painful
« Reply #5 on: February 15, 2019, 01:31:27 PM »
You're right, no question.

ChpBstrd

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Re: Thinking is painful
« Reply #6 on: February 15, 2019, 02:23:02 PM »
The main justification for holding cash long-term is that reducing portfolio volatility may prevent the scared primate in charge of the portfolio from trading out of stocks at the bottom of each correction or in reaction to "news". You could achieve this objective in other ways though.

What if you set your AA to 95% stocks, 5% protective options, specifically the collar strategy? This AA would make it impossible to suffer catastrophic losses, but at the expense of best-case-scenario growth. Your original intended AA does not protect against catastrophic losses, and your realistic upside is already limited by the bonds.

Example:

1) Buy SPY at 276.64
2) Buy a put option on SPY expiring in 2.8 years at the 260 strike price. Price: $22.82/share
3) Sell a call option on SPY expiring in 2.8 years at the 340 strike price. Credit: $8.66

In 2.8 years, your annualized capital gain/loss will be between +6% and -3.7% with mathematical certainty. The higher end of that range would be historically much more likely. But your range of returns is set no matter what happens. In the event of another 2008, for example, your annualized capital losses would be limited to -3.7% instead of ten times that amount.

These are capital gains/losses only. Add almost 2% to the numbers above to account for dividends! Now you're expecting an annualized total return between about +8% and -1.7%.

Psychologically, you would still have to endure watching your hedge decay over time, but you'd be holding a 95% stock portfolio thanks to that hedge. As the stocks go up, the hedge goes down and vice versa. Your portfolio volatility would drop significantly.

In the event of an actual market crash, you'd have the opportunity to sell your hedge for a profit and ride the rebound back up.

Best of all, the hedge I've described above has become cheaper since the market rebound. It now costs about the same as your cash allocation.

Portfolio volatility reduced - check!
Fear / risk eliminated - check!
Cash productively deployed per a strategy - check!
No longer gambling or timing - check!

CrankAddict

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Re: Thinking is painful
« Reply #7 on: February 15, 2019, 02:54:28 PM »
I'll be honest, that sounds amazing but it's over my head.  I have zero experience with or knowledge about options.  Is "collar strategy" a reasonable google to start learning a bit more about this sort of thing?  And are options even an, uh, option, within a 401k or is this a taxable account only tool?

JAYSLOL

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Re: Thinking is painful
« Reply #8 on: February 15, 2019, 03:12:27 PM »
Here, play this a dozen times and see if buying th dips works better for you or buying right away works better - https://theinvestorchallenge.com/games/com_game_monthly.php

Travis

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Re: Thinking is painful
« Reply #9 on: February 15, 2019, 03:18:03 PM »
Buy now.  For all you know you'll accidently buy at a drop in three months and it'll all wash out.  Over the next 100 months of investing the difference won't mean a damn thing.

Telecaster

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Re: Thinking is painful
« Reply #10 on: February 15, 2019, 03:19:40 PM »
I'll be honest, that sounds amazing but it's over my head.  I have zero experience with or knowledge about options.  Is "collar strategy" a reasonable google to start learning a bit more about this sort of thing?  And are options even an, uh, option, within a 401k or is this a taxable account only tool?

Options are complex financial instruments.  What happens to most people when they dabble with complex financial instruments is they blow their fingers off.

Listen to what your head is telling you.  Your investing horizon could easily be 50 or 60 years.   Go pull up a stock market chart from 1955.   Can you figure out the best time to invest?  No!  The length of time in the market complete dwarfs short term fluctuations.   So get in the market ASAP and stay there. 

CrankAddict

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Re: Thinking is painful
« Reply #11 on: February 15, 2019, 03:50:42 PM »
I'm definitely not good at figuring out the best times to invest.  My skill is finding the worst times.  Like entering the job market in 1999 and starting to save for retirement in 2000.  Lost an entire decade, DJIA was 11k in 2000 and 11k again in 2010.  Jumped around between a few different financial planners in the following years thinking I must have just been doing it wrong.  Nope, still crap from 2010 to 2016 under their "professional" guidance.  Finally jumped ship to Vanguard in August 2016.  Been in total market and total bond index funds since, but still have only averaged 7.7% returns since 2016. 

I don't know the exact numbers, but going off my best estimates of annual contributions vs current balances, I've made a TOTAL of 27% in 20 years of investing, with 2/3 of those gains coming in the last 2.5 years.  Overall that's a whopping 1.2% on average per year.  So while I totally get the "just put it in there and forget it mentality" I only have so many decades that I can afford to have do nothing for me.  Now, is doing something reckless or emotional a good way to make up for lost time?  Of course not.  But I suppose it at least explains the pull on my otherwise rational mind to try something, anything, to accelerate things a bit.

ILikeDividends

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Re: Thinking is painful
« Reply #12 on: February 15, 2019, 04:48:54 PM »
But I suppose it at least explains the pull on my otherwise rational mind to try something, anything, to accelerate things a bit.
Resist that pull.  You can certainly "accelerate things" as much as you want.  What you can't do, with any certainty, is pick the direction you are accelerating towards.

Two and a half years ago you settled into a reasonably good investing approach.  It's a mistake to average those very decent returns out over the past two decades, because you were doing it all wrong for most of that two decades.

You had a broken strategy for most of the last two decades, but you eventually did fix it.  Better late than never.  Stick with what's finally started to work for you; i.e., don't "fix it" if it ain't broke.
« Last Edit: February 15, 2019, 04:56:51 PM by ILikeDividends »

Andy R

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Re: Thinking is painful
« Reply #13 on: February 15, 2019, 07:31:17 PM »
OP,

The purpose of an asset allocation is exactly for the sake of not having to think.

CrankAddict

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Re: Thinking is painful
« Reply #14 on: February 15, 2019, 08:04:33 PM »
You had a broken strategy for most of the last two decades, but you eventually did fix it.  Better late than never.  Stick with what's finally started to work for you; i.e., don't "fix it" if it ain't broke.

I agree with your overall conclusion that I'm on the right track now, but I'm not sure how 2000 - 2012 was really a result of me having a broken strategy.  Vanguard Total Stock Market Index was the same price in March of 2000 as it was in March of 2012.  It was this completely flat 12 years which duped me into thinking I needed something more exotic and that did lead me off path from 2012 to 2016.  I'd say you have to look pretty hard to find another 12 year period in my lifetime that was as pathetic as that one.

ILikeDividends

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Re: Thinking is painful
« Reply #15 on: February 15, 2019, 08:51:45 PM »
You had a broken strategy for most of the last two decades, but you eventually did fix it.  Better late than never.  Stick with what's finally started to work for you; i.e., don't "fix it" if it ain't broke.

I agree with your overall conclusion that I'm on the right track now, but I'm not sure how 2000 - 2012 was really a result of me having a broken strategy.  Vanguard Total Stock Market Index was the same price in March of 2000 as it was in March of 2012.  It was this completely flat 12 years which duped me into thinking I needed something more exotic and that did lead me off path from 2012 to 2016.  I'd say you have to look pretty hard to find another 12 year period in my lifetime that was as pathetic as that one.
Admittedly, you were dealt a bad hand in terms of when you started to invest; but strictly comparing a price-only index (not including reinvested dividends) doesn't reveal the whole picture.

Also, assuming you were still gainfully employed during that 12 year period, you should have been plowing periodic investments into that index, then priced at a discount, with every paycheck.  Were you?

If you had been doing both of those things, you would have hit break-even quite a bit before 2012, and then you would have been off to the races long before your misadventures with a financial planner.  2007-2008 would have been another great opportunity to accumulate assets at a steep discount.

Something to think about, eh?  Stay the course.  You'll do well.  Market temper tantrums are events to be exploited, not feared, when you're still in the accumulation phase.
« Last Edit: February 15, 2019, 09:04:23 PM by ILikeDividends »

MustacheAndaHalf

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Re: Thinking is painful
« Reply #16 on: February 16, 2019, 04:39:57 AM »
1) Buy SPY at 276.64
2) Buy a put option on SPY expiring in 2.8 years at the 260 strike price. Price: $22.82/share
3) Sell a call option on SPY expiring in 2.8 years at the 340 strike price. Credit: $8.66

In 2.8 years, your annualized capital gain/loss will be between +6% and -3.7% with mathematical certainty.
I might be missing something.  Let's take 2018 as an example, when SPY lost -4.6%.  So you buy 1 share SPY and the options mentioned above for a total of $290.80.  Over 1 year SPY drops -4.6%, and neither option provides any benefit.  You own options that are not useful, and 1 share of SPY worth $262.25.

Haven't you lost -9.8% in that 1 year? 

Also, when you sell a call option, aren't you obligated to surrender your 1 share of SPY for $340/share?  In the past 3 years, SPY gained +16.4% / year, for a net return of +57.7% over 3 years.  With a 3 year option (I don't have 2.8 year performance numbers), you give up all performance over +23%, or +37% in this case.  Why trade a fixed +3% for losing +37%?  (The 5-year and 10-year performance would also exceed +23% in 3 years).
http://performance.morningstar.com/funds/etf/total-returns.action?t=SPY

MustacheAndaHalf

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Re: Thinking is painful
« Reply #17 on: February 16, 2019, 04:42:54 AM »
I'm definitely not good at figuring out the best times to invest.  My skill is finding the worst times.
But if you make purchases over a number of weeks or months, you can't get it wrong every time.  So your original question was about a chunk of cash, and an inability to know when to start.  In addition to that chunk of cash, you make monthly contributions, correct?

Take each monthly contribution, and match it with an equal amount from that chunk of money you haven't invested.  Meaning, if you're making a monthly contribution of $1500, then take $1500 from the uninvested chunk and invest that (for a total of $3000/month).  That way you're not changing your timing - you're going with the flow of existing contributions, while also fighting the urge to procrastinate.

CrankAddict

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Re: Thinking is painful
« Reply #18 on: February 16, 2019, 08:27:04 AM »
Market temper tantrums are events to be exploited, not feared, when you're still in the accumulation phase.

This sounds reasonable, but in terms of specifics, are you referring to simply making your normal scheduled monthly buys at reduced prices or actually having some cash reserves to buy a larger quantity at such times?

Also to address your other questions, I've been self employed my entire career, so unfortunately during the darkest days of the markets I haven't felt I could afford any investment, on certainly not any extra investment due to the variable nature of my income (my best year earned 8x my worst year, so kind of hard to know what you can afford in general).  I hate debt, so I never wanted to push things too far and over-commit to retirement only to have to pull it back out with penalties.  The good news is I have no house or car payments, only child's college was paid in full, but looking at the retirement funds still leaves me with a sinking "this is never going to cut it at this rate" kind of feeling.

Travis

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Re: Thinking is painful
« Reply #19 on: February 16, 2019, 11:40:53 AM »
You had a broken strategy for most of the last two decades, but you eventually did fix it.  Better late than never.  Stick with what's finally started to work for you; i.e., don't "fix it" if it ain't broke.

I agree with your overall conclusion that I'm on the right track now, but I'm not sure how 2000 - 2012 was really a result of me having a broken strategy.  Vanguard Total Stock Market Index was the same price in March of 2000 as it was in March of 2012.  It was this completely flat 12 years which duped me into thinking I needed something more exotic and that did lead me off path from 2012 to 2016.  I'd say you have to look pretty hard to find another 12 year period in my lifetime that was as pathetic as that one.

Only flat if your entire investing horizon exists between those 12 years and you only bought shares in March 2000.  If you bought anything in-between, then for you the market was not flat.  If you bought shares in 2009 and looked at just those shares in 2012 you'd never stop grinning.

matchewed

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Re: Thinking is painful
« Reply #20 on: February 16, 2019, 12:31:45 PM »
I'm definitely not good at figuring out the best times to invest.  My skill is finding the worst times.  Like entering the job market in 1999 and starting to save for retirement in 2000.  Lost an entire decade, DJIA was 11k in 2000 and 11k again in 2010.  Jumped around between a few different financial planners in the following years thinking I must have just been doing it wrong.  Nope, still crap from 2010 to 2016 under their "professional" guidance.  Finally jumped ship to Vanguard in August 2016.  Been in total market and total bond index funds since, but still have only averaged 7.7% returns since 2016. 

I don't know the exact numbers, but going off my best estimates of annual contributions vs current balances, I've made a TOTAL of 27% in 20 years of investing, with 2/3 of those gains coming in the last 2.5 years.  Overall that's a whopping 1.2% on average per year.  So while I totally get the "just put it in there and forget it mentality" I only have so many decades that I can afford to have do nothing for me.  Now, is doing something reckless or emotional a good way to make up for lost time?  Of course not.  But I suppose it at least explains the pull on my otherwise rational mind to try something, anything, to accelerate things a bit.

Maybe I don't understand something here. Were you just investing a lump sum and not investing any more money for each decade? If you were actually in DJIA 2010 to 2016 you wouldn't have lost anything. Your story isn't clear and there is more to it than what you are portraying I believe.

ILikeDividends

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Re: Thinking is painful
« Reply #21 on: February 16, 2019, 02:19:38 PM »
Market temper tantrums are events to be exploited, not feared, when you're still in the accumulation phase.

This sounds reasonable, but in terms of specifics, are you referring to simply making your normal scheduled monthly buys at reduced prices . . .
Yes. Basically, just keep to your plan, regardless of what the market is doing.

My plan includes a 5% cash allocation.  So when the market falls I have to buy enough stock to bring my cash allocation back down to 5%.  And when the market goes up too much, I have to sell stock to bring my cash allocation back up to 5%.

If I were still accumulating (I'm not) I wouldn't have a cash allocation.  It's for you to decide whether a cash allocation makes sense for your circumstances.  With the variability of your income, a cash allocation might be something to consider.

So, again, whatever your plan is, just keep doing it.
« Last Edit: February 16, 2019, 03:22:19 PM by ILikeDividends »

CrankAddict

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Re: Thinking is painful
« Reply #22 on: February 16, 2019, 03:02:37 PM »
Only flat if your entire investing horizon exists between those 12 years and you only bought shares in March 2000.  If you bought anything in-between, then for you the market was not flat.  If you bought shares in 2009 and looked at just those shares in 2012 you'd never stop grinning.

Well there's more than one way to get from 30 to 30.  Sure, if I bought at 30 and then it instantly dropped to 15 and I kept buying then when it got back to 30 I'd be in ok shape.  But what if it first went to 45 while I kept buying, and then when it dropped to 15 I stopped buying?  As I said my (self employed) income was heavily tied to the current economy and in bad years I didn't have as much, or any, to invest.  So I missed out on most of the "good deals".  In my case, when we eventually get back to 30 and I'm even on some things, still underwater on others.  But at least I'm buying again.  Further down the road I've made some on the 30 shares but I've still only broken even on the 45s.  It's not a scheme for massive gains.  These are all examples of course, not actual precise descriptions.  The truth is that I do not have my statements from 20 years ago and after passing between 4 different brokerages there is no single account that I can reference to see total amount contributed vs current balances.  I'm just ballparking based on what I know I used to try to contribute, the years I know I didn't contribute at all, etc.

Maybe I don't understand something here. Were you just investing a lump sum and not investing any more money for each decade? If you were actually in DJIA 2010 to 2016 you wouldn't have lost anything. Your story isn't clear and there is more to it than what you are portraying I believe.

I am trying to be as transparent as possible.  Anything that sounds off compared to expected performance is not intentional and most likely reflects my poor moves early on combined with lack of detailed persistent records.  Keep in mind that in my younger years I was not savvy enough to seek out low cost funds like what I'm currently in.  Instead I was working with people who were putting me into front-loaded investments and funds with high fees.  After 4 years of not making much progress I'd get frustrated and move elsewhere, only to restart the front-load cycle in most cases (again, not realizing these things at the time, just using brilliant logic like "hey this guy (literally) drives a Ferrari and I drive a Toyota, he must know something, right?!"). 

So while the 2000 - 2012 period had me in funds they certainly weren't good funds.  This set me up for thinking that individual stocks and having a more actively managed portfolio by an even more brilliant financial planner was the real key.  2012 to 2016 amounted to me checking in with him annually saying things like "by my calculation all this 'fancy' stuff you are doing has me basically breaking even with a Vanguard index (the latter of which was on my radar by then thankfully), except that I then have to pay you 1% on top".  Then I finally pulled the plug.  So yes, it's a shit show, not a history I'm proud of.  I should probably own more of the blame personally than I do, but the disgruntled part of me just says "dammit, if only I were 12 years older I could have bungled my way through a 550% increase in the Dow period vs a 0% increase period.  Somehow it seems like that would have put me in a very different place numerically and mentally.  Losing market gains is one thing, losing actual earned income is another. 

But anyway, we're on to better things now.  Thanks for the responses, apologies for the whining ;)

harvestbook

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Re: Thinking is painful
« Reply #23 on: February 16, 2019, 04:44:58 PM »
That's why my investing motto is "I'm not smart enough to know and I can't afford to guess."

Andy R

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Re: Thinking is painful
« Reply #24 on: February 16, 2019, 07:23:47 PM »
That's why my investing motto is "I'm not smart enough to know and I can't afford to guess."

Yep, and I would add

"I'm not smart enough to know or to find those funds with managers that do and I can't afford to guess."

ChpBstrd

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Re: Thinking is painful
« Reply #25 on: February 17, 2019, 10:46:06 AM »
I'll be honest, that sounds amazing but it's over my head.  I have zero experience with or knowledge about options.  Is "collar strategy" a reasonable google to start learning a bit more about this sort of thing?  And are options even an, uh, option, within a 401k or is this a taxable account only tool?

Here's a better description:

https://www.optionseducation.org/strategies/all-strategies/collar-protective-collar

You can buy options in a 401k.

ChpBstrd

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Re: Thinking is painful
« Reply #26 on: February 17, 2019, 11:39:57 AM »
1) Buy SPY at 276.64
2) Buy a put option on SPY expiring in 2.8 years at the 260 strike price. Price: $22.82/share
3) Sell a call option on SPY expiring in 2.8 years at the 340 strike price. Credit: $8.66

In 2.8 years, your annualized capital gain/loss will be between +6% and -3.7% with mathematical certainty.
I might be missing something.  Let's take 2018 as an example, when SPY lost -4.6%.  So you buy 1 share SPY and the options mentioned above for a total of $290.80.  Over 1 year SPY drops -4.6%, and neither option provides any benefit.  You own options that are not useful, and 1 share of SPY worth $262.25.

Haven't you lost -9.8% in that 1 year? 

Also, when you sell a call option, aren't you obligated to surrender your 1 share of SPY for $340/share?  In the past 3 years, SPY gained +16.4% / year, for a net return of +57.7% over 3 years.  With a 3 year option (I don't have 2.8 year performance numbers), you give up all performance over +23%, or +37% in this case.  Why trade a fixed +3% for losing +37%?  (The 5-year and 10-year performance would also exceed +23% in 3 years).
http://performance.morningstar.com/funds/etf/total-returns.action?t=SPY

Let's assume I made the above trade at the above prices on Jan 1, 2018, with an expiration date one year sooner as was available at that time, and I'm looking at performance on Jan 1, 2019. I would not be down (290.8-262.25)/290.8 = -9.8% because I would still be holding options with 2.8 - 1 = 1.8 years remaining.

Those options would still have most of their value. In fact, due to SPY going down, the puts that I own may have increased in value and the calls that I owe others may have decreased in value. I'd probably outperform the SPY, but I'm not sure (and I'm too lazy to run the sim software). It's not a perfect hedge at all time points throughout the lifetime of the position, because there are a lot of moving parts like time decay, volatility, interest rates, and all the other inputs. While there is still time remaining on options, they do not move dollar-for-dollar with the stock. However when the options expire the value of the position is easy to calculate.

If the SPY in 2.8 years is above the strike price of my puts, I would underperform the market. Similarly, if the market continued to zoom up beyond the strike price of my calls, my shares would get called away on the expiration date and I'd do worse than if I'd held only the shares. These risks are the price you pay for insurance. With that price and the assurances it buys, you can at least invest more aggressively and hold your position with confidence during corrections. That alone might pay for the insurance.