August 20, 2019 By Faith Doyle, MBA
Trying to track to the S&P is like trying to mirror your wardrobe to keep up with Lady GaGa…It’s risky. The rewards can be great, but sometimes you find yourself wearing a meat dress, and that’s just uncomfortable for everyone. You may feel great after the highs, but the lows can be hard to recover from. If you had just taken the Kate Middleton (Duchess of Cambridge) approach, you’d be consistently seen as a nice dresser and always look classy.
That’s the difference between beating the S&P and taking a more moderate approach with your portfolio.
Recently, I sat down with a new client who asked me, “How does your portfolio’s performance compare to the market?” She was referring to the S&P. Study after study has shown that beating the S&P over the long-term is not probable, yet it is brought up quite frequently when I meet with new clients. I usually see this as an opportunity to ensure that they understand what that entails. I usually respond with, “Are you looking for that?” This is usually met with either a “yes” or a look of confusion. As we discuss further, they see that this isn’t a sustainable investment plan. In fact, it’s one that will lead to missing their goals along with a lot of stress as they ride the ups and downs.
On the surface, beating the S&P sounds like a reasonable and smart goal, but it is a risky proposition and can be very stressful, especially in a volatile period of time for the market. It’s not typically congruent with the level of risk most investors are willing to take, and can be detrimental to their goals. Risk is a combination of personal feeling for how much is acceptable, what’s appropriate for your time horizon (proximity to your goal), and the amount of assets you have to risk.
To help illustrate this example, see the chart below1. You don’t have to bring up ancient history. You can just rewind to 2008-2009 and see what taking this sort of stance would have done to your portfolio. If you had, for example, $100,000 in October of 2007 (the height of the S&P before the Great Recession) fully invested in the S&P, then you could have lost over $50,000 during the crash, leaving you with less than $50,000 on March 9, 2009 (the lowest point of the recession). If you had stayed invested (and that’s a big “if”), it would have taken you until March of 2012 to make up your loss. That’s three years to make back what you lost. Looking at a more diversified approach, a 60% stocks/40% bonds portfolio would have caused you to lose $30,000 and only taken until October of 2010 (19 months) to recover the losses.
Source: JP Morgan Asset Management. 60/40: A balanced portfolio with 60% invested in S&P 500 Index and 40% invested in high-quality U.S. fixed income, represented by the Bloomberg Barclays U.S. Aggregate Index. The portfolio is rebalanced annually. Average asset allocation investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions, and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20-year period ending 12/31/18 to match Dalbar’s most recent analysis. Guide to the Markets-U.S. Data are as of July 31, 2019.
Over a 20-year period on an annualized basis from 1999-2018 (the average of all returns over 20 years), the S&P was 5.6% and a 60/40 portfolio was 5.2%. The difference is minimal over 20 years as far as average return goes during that 20-year period. However, the ups and downs were much less intense with a diversified portfolio. With that being said, for all that risk during this 20-year period, it wouldn’t get you that much leverage. Now imagine, if that recession happened when you were having to withdraw from the portfolio, such as for retirement, you may have never made up the losses. It may change your retirement picture. Perhaps you can’t spend as much now, or worse, you’ll have to go back to work!
Tracking to the S&P sounds thrilling, but does it align with your goals? We instead look at the goals of the investor and build a plan to try to help the client reach their goals while taking the least amount of risk possible. We suggest building a plan based on your individual financial situation and then follow that plan. Ladies, be a Kate. It’ll be easier to explain when your kids are grown and ask you, “Why did you wear THAT?!”
- Lady Gaga: https://www.cosmopolitan.com/uk/fashion/celebrity/news/a38329/lady-gagas-meat-dress-what-looks-like-now-photos/
- Princess Kate: https://www.hellomagazine.com/fashion/2013061713076/kate-middleton-princess-diana-style-icons/
Investing involves risk and investors may incur a profit or a loss. Investing involves risk and you may incur a profit or a loss regardless of strategy selected, including diversification and asset allocation. Past performance may not be indicative of future results.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. One cannot invest directly in an index.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.