Are you Underperforming the Market?
How did your portfolio perform compared to the stock market? There are good reasons to hope that it did. In this episode we discuss why.
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Full Transcript below:
00;00;00;00 - 00;00;29;08
Unknown
Welcome back to 30 Minute Money. It's a podcast that delivers action oriented, smart money ideas in bite sized pieces. I'm Scott Fitzgerald from Roc Vox Recording and Production, Steve, Wershing from Focused Wealth Advisors here to talk about the stock market. Yes. To find out if, if you're doing good or doing bad. Yeah. Well, the, the question for today is, are you underperforming the stock market?
00;00;29;09 - 00;00;49;14
Unknown
And my answer to that is, boy, I certainly hope so. Okay. I'm interested in what that means. Yeah. So I wanted to talk about and I say that, you know, sort of tongue in cheek, because I think, a lot of people may make, mistakes, may make poor decisions because they compare what they have to the stock market.
00;00;49;14 - 00;01;17;25
Unknown
And there there are some distortions out there that we should really talk about. Interesting. So you're talking about like, I look at my portfolio and I compare it to what's trending or what's going on with the the S&P and Dow Jones and all that. Exactly. And that's, that's, that's and there's danger in that. because what people see on the news is what the Dow Jones Industrial Average did or what the S&P 500 did, and that's just one element of a portfolio.
00;01;18;02 - 00;01;37;17
Unknown
And and like I said, there are some kind of weird things going on. So I just, you know, I wanted to talk a little bit about that. And then it's compounded by, you know, the news that, you know, you there's this argument all the time about, you know, do money managers add value or do actively managed in, investments add value?
00;01;37;17 - 00;01;59;17
Unknown
Should you buy an actively managed mutual fund or an index fund or those kinds of things? And what, you know, one of the things that they always say is well managed funds outperform or underperform the S&P 500. and that that's a you know, that's a reasonable thing to analyze over the long term. But in the last year or two even that's deceptive.
00;01;59;20 - 00;02;21;13
Unknown
And this and this is why, the S&P 500 has been on fire for the past six months or a year. but if you drill down into it, what we find out is that not every stock in the S&P 500 is on fire. it's a very small number of stocks that account for a significant part of that.
00;02;21;20 - 00;02;53;06
Unknown
And so it's not reflective of a well-diversified portfolio. And in the long run, you know, if you have a well-diversified portfolio, it will have underperformed the S&P 500 last year. It may have underperformed the S&P 500 badly last year. So last year you made less money. But in the long run, it's a much better idea. And I just want people not to get all caught up in what happened over the last year and make a mistake for the long term, and specifically, I want to talk about the S&P 500 and some of the distortions that are in there.
00;02;53;09 - 00;03;12;22
Unknown
So if you you know, last year the S&P 500 went up. You know what the the one year. So we're sitting here and it's March. And and so I took a look at the last 12 months. And over the last 12 months the S&P 500 went up 30%. which you know, if you're keeping track is a good year.
00;03;12;24 - 00;03;42;02
Unknown
So, but, if you look inside the S&P 500, there are seven where this is especially true for the year 2023. There are seven stocks that accounted for the lion's share of that return. Now, historically, the median is that 49% of stocks in the S&P 500, outperform the index, which is, you know, about what you would expect, right?
00;03;42;02 - 00;04;02;07
Unknown
49% is about half. So you did half that did better than the index and half that did worse than the index. That sounds like a bell curve. Bell bell curve to me. Right. So normal distribution last year it was seven stocks. And why do those seven stocks have so much influence. Because the S&P is not equally weighted. It's not.
00;04;02;10 - 00;04;27;02
Unknown
It has 500 stocks and it but but it doesn't mean that each stock is one 500 of the index. And so for example I printed off the list and Microsoft is 7% of the S&P 500. Wow. So 500 stocks 7% is one stock. Apple is almost 6% of the index in terms of, you know, how they measure it.
00;04;27;04 - 00;04;50;26
Unknown
Nvidia and Nvidia, is on fire because they are involved in, artificial intelligence and artificial intelligence, of course, is making everybody excited. And they're big breakthroughs and those kinds of things. Nvidia stock is up, I don't know like 100% over the last, you know, six months or a year. but and that alone, that stock alone is 5% of the S&P 500.
00;04;50;26 - 00;05;14;05
Unknown
So it's not reflective of what's going on. Now there's you know there are there are it's they're not technically index funds, but you can get, mutual funds or exchange traded funds that are actually the S&P 500 stocks equally weighted. So the S&P 500 is not equally weighted. The biggest companies exert the most influence, but you can get an equally weighted one.
00;05;14;08 - 00;05;37;06
Unknown
And if we look at the S&P 500, like I said, it's up 30% over the past 12 months. If we look at the equally weighted one, it's up 13%. Oh wow. Less than half the performance across all 500 stocks compared to the the weighted at the weighted version of it which is up 30. So let's not get too carried away.
00;05;37;08 - 00;05;59;17
Unknown
by you know what the S&P did. And comparing that now you know also that's just within the index right. We also we don't want to have an A portfolio that's all stocks. You know you want things like stocks and bonds. You know we have all these different asset classes that we bring into those things. But if you just look at like the standard normal kind of thing that everybody compares it to is a 6040 portfolio, right?
00;05;59;17 - 00;06;28;25
Unknown
60%. The S&P 540%. the, the Barclays Aggregate Bond Index. And if you look at a 60, 40 portfolio from last year, the S&P 500 went up 30%, a 6040 portfolio went up 16%. so if you're somebody, you know, who's in the in the middle of their career and you've got a reasonably well balanced portfolio in your portfolio, did 16% last year, don't be sad about that.
00;06;28;26 - 00;06;54;15
Unknown
Yeah it's okay. Don't don't call your financial advisor and say why didn't I get 30%? It would be irresponsible to put you in things that would position you to get 30%. You'd be taking too much risk. And I just want. I want people to know that because that's what a lot of people and naturally enough, it's it's what a lot of people would tend to do now, if every year was going to be like 2023, I'd say, heck, let's just put everything in the S&P 500, right?
00;06;54;17 - 00;07;16;03
Unknown
The problem is that the market goes up in the market goes down. It's cyclic. you know, the the, the statisticians, the investment research folks would call it regression to the mean. And if the S&P 500 has been going up that much for the last year or so, and it regresses to the mean, that means it's going to be coming down.
00;07;16;03 - 00;07;37;02
Unknown
So it meets that trend line again at some point. And bull markets and bear markets are don't behave the same way. Bull markets tend to go up typically a little bit more gradually than this one does. But but bull markets tend to go up a little more gradually and for a lot longer than bear markets. Bear markets tend to be swift and brutal.
00;07;37;04 - 00;07;56;02
Unknown
And so if you're thinking, oh, I should really overweight stocks or I should overweight, let's let's just put 20% of my portfolio in Nvidia. You know, because I'm, I like that stock gets on fire. You're not going to have time to respond when things go bad. It's too late. It's too late by the time you know about it.
00;07;56;04 - 00;08;10;01
Unknown
You know you're going to have a lot. And you know you're and you don't want to just jump out when something goes down a little bit. I mean, things go down and then they go back up again. So I mean, you might see something go down and say, okay, well it's a it's a short term blip. And then it might go down a little bit more and say, yeah, well, you know, it's just going up and down.
00;08;10;05 - 00;08;39;18
Unknown
By the time you take action, it's going to be too late and you're going to realize more damage because you got overweighted and stuff that you that you shouldn't have, should not have been in. So yeah, well diversified portfolio in years like last year will lag the S&P 500. But over the long term it will protect you. And if you are diversified and you have, you know, you're using asset allocation, which means having a pie chart that has all kinds of different things represented.
00;08;39;21 - 00;09;00;07
Unknown
the way you can take advantage of that is by rebalancing. Asset allocation doesn't work because it's a pie chart with a whole bunch of slices in it. It works because you rebalance it. Rebalancing just means if you have to oversimplify a 6040 portfolio and you go through 2023, it's not going to be 6040 anymore because S&P is going to be a lot and the bonds are not going to be up that much.
00;09;00;14 - 00;09;31;10
Unknown
It's going to be more like 6535 or it's going to be 67, you know, 37, 33, something like that. And and what what helps reduce risk over the long term and actually sometimes can even increase long term returns is by bringing it back to that 6040 mix. Because doing that systematically over time doesn't mean that you will always be buying at the low and selling at the high, but it's a discipline that forces you to sell when things are relatively higher and buy when things are relatively lower.
00;09;31;13 - 00;09;59;06
Unknown
So, so, you know, don't feel bad in the last year because your portfolio didn't go up as much as the S&P 500. It shouldn't have. Don't compare it to the S&P 500. if you had a well-diversified portfolio it would it will have been lower. But the S&P 500 component of your portfolio probably did very well. And this may be a time to think about doing that annual rebalancing and selling off some of the really profitable stuff.
00;09;59;09 - 00;10;14;02
Unknown
That's not to say it's not going to continue to shoot to the moon. It might. But if you can take some profits off the table and rebalance when things go down, you will be happy that you did that.
00;10;14;05 - 00;10;48;26
Unknown
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00;10;48;29 - 00;11;10;13
Unknown
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00;11;10;13 - 00;11;40;01
Unknown
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00;11;40;04 - 00;11;55;16
Unknown
And speaking of the stock market, you know, it's only just a couple of years ago where I found out that Dow Jones wasn't a real guy. So these two guys, it's two guys. Yeah, it's Dow and Jones and Jones. Oh okay. So I thought there's a guy named Dow Jones. Like like what kind of a name is Dow?
00;11;55;17 - 00;12;17;07
Unknown
Yeah, right. So weird name. I was a kid when I thought that it was. Well, that's okay. Just the other day and, you know, a little bit of investment review. The Dow Jones Industrial Average is not the only Dow Jones average. Oh, really? Nope. They're three. There are three. See it's amazing what you learn podcast so much. What's your 30 minute action item 30 minute action item is what is your allocation?
00;12;17;07 - 00;12;36;19
Unknown
How much do you have in different kinds of stocks and how much do you have in different kinds of bonds? There you have it. Are you underperforming the stock market? The answer is given. And thank you for listening and watching the 30 minute money. It's three zero minute money. Don't forget to like and share and subscribe to our podcast on all the platforms.
00;12;36;21 - 00;13;03;20
Unknown
And Steve Wershing can be found at Focused Wealth Advisors. I can be found at RocVox.com. We will see you next time on 30 Minute Money.