Di-worse-ification
Submitted by Bond & Devick Wealth Partners on November 16th, 2023Investors diversify portfolios to help mitigate risk. In addition, since the future is unknown, diversification can help provide investors with the opportunity to share in the appreciation of different asset classes without trying to guess which investments will outperform over the short-term.
Here are the returns for many of the major indexes through October 31st of this year (according to S&P Global, US Bank and MSCI):
S&P 500 Index: +9.23%
Dow Jones Industrial Average: +0.28%
S&P MidCap 400: -2.63%
S&P SmallCap 600: - 6.34%
MSCI EAFE (International stock index): +2.74%
Bloomberg Aggregate Bond Index: -2.77%
Interestingly, if you invested in just the top performing 7 stocks that comprise the S&P 500 Index, the total return would have been +50.7% for the year (through October). Take out those 7 names and the S&P 500 Index is down for the year (NASDAQ). Investing in these 7 stocks (Apple, Amazon, Alphabet, Meta, Microsoft, NVIDIA, and Tesla) is a sure way to make money – until it’s not.
Each Bond&Devick client has an investment objective goal of inflation plus a certain percentage which is based on their retirement projection and financial plan. We use 3% for inflation, which we believe is a reasonable number for long-term forecasts. If a client’s goal is to exceed inflation by 3% then the goal of the portfolio over the long-term would be an investment return of 6%. We design portfolios to try to achieve this goal. Our goal is never to “beat” an index because when we focus on a return objective it helps prevent us from chasing returns. Investors who chased returns in the late 90’s during the tech boom were all but wiped out, investors who rode the real estate boom in the mid 2000’s were also significantly impacted during the great financial crisis as well. Investors who are doubling down on the above referenced 7 stocks may find out that trees don’t always grow to the sky. We have found focusing on a return objective and staying diversified is the best way to maintain wealth over the years and smooth out the ride through boom-and-bust cycles.
Many years ago, one of our clients referred to diversification as di-worse-ification as he grew frustrated with the returns he believed were unremarkable compared to parts of the market that were soaring (this was the late-90’s). Over time he grew to understand the power of diversification and grinding out returns which, to be honest, did not make great party conversation staters, but over time helped him and his family achieve their goals. In the end, he came to understand that boring can be a beautiful thing.
Our entire team wishes you and yours a wonderful Thanksgiving. We are grateful for the trust and confidence you place in our team.
Sincerely,
The Bond&Devick Team
Sources:
https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes
https://www.msci.com/documents/10199/822e3d18-16fb-4d23-9295-11bc9e07b8ba
https://www.nasdaq.com/articles/monthly-market-wrap-october-2023
