Over the last year and even five or six years, many Investors are mistakenly evaluating their portfolio returns vs. some random benchmark like the Dow Jones 30 Industrials or the S&P 500. This is very tempting since dropping to a bear market low on 3/09/09 (i.e., approximately 94 months ago), the S&P 500 stock index has gained +291% (total return) through the close of trading on Friday 12/30/16 or an average gain of +1.5% per month, (source: BTN Research).
How does this happen and what is the rationale for this? While those indices have had stellar returns, they may be forgetting the most important emotional aspect of investing, which is the psychological impact of participating in an up or down market. Studies have shown that there is more negative emotional impact on full participation on the downside or drawdown of an equities market vs. the emotional response to not participating fully in an advancing market cycle. Most investors should remember what they felt as they may have seen or experienced the cumulative 64% decline on the S&P 500 from January 2008 through March 8th of 2009 before the dramatic recovery on March 9th, 2009. But many think they can have the best of both worlds, full participation on the upside of a bull run with hardly any participation in the downdrafts that periodically occur. You can’t have your cake and eat it too as the old adage goes. So, it really evolves around risk tolerance and establishing realistic return and risk parameter objectives.
Over the longer term, as the chart below indicates, a broadly diversified portfolio actually outperformed the S&P 500 index over the last 15 years by a small margin of .2%. In fact, in only five of the last 15 years a diversified portfolio outperformed the S&P 500. However, the diversified portfolio had an 11% standard deviation or variability risk measure vs. 15.9% for the S&P 500. That’s 45% more volatility over 15 years! What’s in your portfolio?
Properly diversified portfolios will never be the best performing category vs. any particular set of benchmarks that are comprised in that particular allocation. There look to be headwinds in many of the capital markets this year with equity valuations getting richer, interest rates creeping higher and uncertainty with the new administration, global macro-economic concerns and more. It’s a good time to re-evaluate your asset allocation holdings and make sure you’re positioned properly going forward. We feel strongly that determining the desired total return and actually quantifying the amount of volatility one can tolerate is paramount to setting realistic expectations with me, your Financial Advisor.
Any opinions are those of Thomas Fleishel and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Diversification and asset allocation do not ensure a profit or protect against a loss. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow”, is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Keep in mind that individuals cannot invest directly in any index, and index performance does not