Note: all data points are taken directly from the S&P 500 index returns as of close of business May 25, 2023
The rules I preach to my clients regarding investing aren’t overly complicated:
1. Buy stocks and offset risk with short term, fixed income.
2. Diversify
3. Rebalance
4. Behave
Of the four rules, by FAR the most complicated is to behave because human beings simply are not hard wired to search for, and sit in, risk. We look to run from pain and towards pleasure or, in the case of investing, we tend to run away from the “red” numbers on our statements and towards the “green”. And of the four rules I’d suggest the easiest one to follow is diversification. This is mostly due to modern application of technology. It wasn’t as easy in, say 1946, to buy a basket of international, small cap value stocks. Even if you could….it would probably have been cost prohibitive.
However, there are times when, as your advisor, I must point out that things we might have taken for granted in the past, like assuming the S&P 500 index is automatically a good diversification of your money and use it as a litmus test to compare how we are doing in your portfolio, is not actually holding up. On its face a basket of 500 stocks would seem to be the definition of diversification. But it’s not. Not right now.
And this is dangerous…very dangerous. Most of the new clients we serve walk into our office with a good amount of money already invested and often they assume because they have a lot of “stuff” that they are diversified away from risk. And often they would be wrong. The trend over the last 10+ years is for advisors to overweight client’s money to the S&P 500 Index. And that can work as long as the stocks that support the heavy returns of that index continue to be on a run, but what happens if just a few of those companies falters? You’d think all should still be ok…there are 500 stocks in the index, after all. But the index isn’t acting like that anymore (at least not in recent years).
Year to date in 2023 the S&P 500 is up roughly 10%. 7 of those 500 stocks are up 45%. The other 493? They are up about 1%. So what are these 7? META, AMZN, MSFT, AAPL, GOOGL, NVDA and TSLA. Those are the companies responsible for the lion’s share of the YTD return in the S&P 500 so far in 2023. In fact, the top 20 stocks in the index account for 29% of the weighting of the index yet they are responsible for 95% of the return!
Some people are calling these stocks the “AI Stocks”. Some think the bull run can continue forever. Some think we are in for imminent doom. But it shouldn’t matter! We shouldn’t be basing your investment portfolio and your entire balance sheet and financial stability on 7 stocks! There is no justification for you to even worry about trying to do any of this.
When we review your balance sheet and we look at future projections of your accumulation or distribution strategy, do we ever plug in 45% rates of return? Doubt it. You probably have seen me plug in numbers between 4-8%. That’s not because I think you’ll only get that, but because I know we need to build a plan that WORKS…not a plan that is built on HOPE…or on 7 stocks.
What’s the biggest danger to you this year as a client of mine? It’s not that these 7 stocks may falter (we don’t have an overweighted position following the S&P 500…not now and not ever, because we DIVERSIFY globally). Your biggest danger is in comparison. How’s the saying go? Comparison is the thief of joy? It can also be the thief of your portfolio and the future of your family’s financial future.
Pay no attention to a single stock, or index, or geographical location…stay focused on the rules:
1. Own equities and offset risk with short term fixed income
2. Diversify (by size, valuation, geography)
3. Rebalance
4. BEHAVE
If you find yourself questioning any of the above, now is the time to reach out to me. Keeping you aligned with your investment plan is the most important job I have as it relates to your investment portfolio.
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 5280 CARROLL CANYON ROAD, SUITE 300, SAN DIEGO CA, 92121, 619-6846400. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. WESTPAC WEALTH PARTNERS LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through WestPac Wealth Partners and Insurance Services, LLC, a DBA of WestPac Wealth Partners, LLC. CA Insurance License # 0D34103 | Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. | 2023-156436 Exp. 06/25
Past performance is not a guarantee of future results. Indices are unmanaged and one cannot invest directly in anindex. Diversification does not guarantee profit or protect against market loss.All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit and inflation risk. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investing in securities of smaller companies tends to be more volatile and less liquid than securities of larger companies. Investing in foreign securities may involve heightened risk including currency fluctuations, less liquid trading markets, greater price volatility, political and economic instability, less publicly available information and changes in tax or currency laws. Such risks are enhanced in emerging markets. References to specific securities, asset classes, or portfolio models are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security.
