The most commonly asked question of financial advisors is “why didn’t my portfolio perform as well as the S&P 500?” Interestingly, clients don’t seem to ask this question when the S&P 500 falls 10% and their portfolio drops by 5%... I will take a couple of paragraphs to address the current state of the market, viewed through the eyes of the S&P 500 and a typical investor.
First, let’s examine the history of the S&P 500 (S&P). The index as we know it began in 1957, when Standard and Poor’s expanded its well-known list to 500 companies. However, the S&P goes back to 1926 when it was known as the “Composite Index,” and it was made up of 90 companies. The S&P is a weighted index, based on market capitalization (Majestic’s advisors can explain this if you would like). As an investor, the index is used in different ways. It can be used as a benchmark – how did your portfolio compare to the overall S&P? It can be used to “buy” the market – buy shares of an S&P ETF or mutual fund. Or it can be used to identify stocks that may fit an investor’s portfolio based on the stock’s weighting in the index. Over the course of years, the companies that make up the index have changed – in some cases substantially. Only seven of the top 25 companies in the S&P in 2001 remain in the index (let alone in the top 25). Many of the companies that are no longer a part of the S&P are well known companies that have experienced a change in consumer demand for their goods/services. Due to the change in world economics, only one company that was in the top 10 in 2001 still remains in the top 10. Microsoft is still the number 2 weighted company in the index. This brings us to 2022 and 2023. In January of 2022, the major indices (S&P 500, Dow Jones, NASDAQ) all started dropping. Over the course of the first quarter of the year, all three entered correction territory and remained in Bear Market territory until early 2023. The primary reason for this was the drop in the big names of the indices. Apple, Google, Amazon, Microsoft, Meta (Facebook) and others dropped over 30% each. Owning the S&P through either a mutual fund or an ETF, means a drop point by point without owning any of the individual companies that were falling. This scenario can create heartburn every time the news reports a drop in the S&P. In 2023, this trend reversed. As of the writing of this blog (11/6/2023), the S&P has gained 13.71% (which means it is still below 2021 levels). This is above the average annual return of the index. However, 12 companies have made up 34% of this gain. The Information Technology, Communication Services, and Consumer Discretionary sectors are all up over 33%, more than double the overall index. The stocks driving the S&P are: Nvidia, Meta Platforms, Tesla, Royal Caribbean, Carnival, General Electric, Palo Alto Networks, PulteGroup, Airbnb, West Pharmaceutical Services, Advanced Micro Devices, and Booking Holdings. Do you recognize all of these companies? SO, when a 2023 investor asks why they haven’t had the S&P 500 return, the answer is simple – do they own these 12 companies? It’s not a recommendation. The choice is whether to own individual stocks – and accept the risk that they could fall substantially – or own an index and potentially limit exposure to both the losses and the gains of these same stocks. The bottom line to investing is to make sure that your goals and time horizon align with your portfolio. If you want simple investing and you don’t mind your portfolio just moving with an index, an ETF that matches the index might be the right investment. Personalization of a portfolio may increase both risk and return – which may be what the client wants. Written by Sean Budlong, CFP®, AAMS, Chief Executive Officer, Majestic Financial, Financial Consultant, RJFS Disclosures: *Any opinions are those of Sean Budlong and not necessarily those of RJFS or Raymond James. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and you may incur a profit or loss regardless of strategy selected. *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 NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. *Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Benchmarks help us gauge our progress, performance, and results. As humans we compare ourselves to others more often than we think, consciously and subconsciously. Sometimes this can be a healthy behavior, while other times it can be a detriment. Kids racing each other at a park, constant sibling rivalries (usually about the most ridiculous things), competition for a promotion at work, an inner motivation to improve oneself by improving one’s fitness from one point of time to the next, reading more books than last year, or earning more money from one year to the next; all involve comparing one result to another over a given timeframe. Comparison and competition go hand in hand. It is paramount to compare similar things to each other though. At one time, it would be silly to gauge my performance by me beating my son in a race. I’m older, been doing it for longer, have longer legs and should be faster and stronger, but he just beat me recently…and I’m still trying to cope with it. Benchmarks need to be evaluated for their accuracy and this benchmark recently changed. The comparison should be apples to apples.
This leads me to something that should be addressed, especially when it comes to investing and specifically this year. After a tough last year where it seemed all areas of the market experienced losses, we are experiencing a rebound this year. As I am typing this, the “market” (Standard and Poor’s 500 Index) is up 14.54% (7/10/2023). Should we be overly excited with this increase, be cautiously optimistic since the Nasdaq Composite is up 31.12% for the year or totally dismiss it since the Dow Jones Industrial Average is only up 2.21% for the year? When people refer to the “market”, they can be referring to any of these indexes (or indices, both are acceptable versions of the plural form of index, by the way), or benchmarks. These are all ways to gauge how the “market” is doing, but they are not all the same and far from a good apples to apples comparison. There are a lot of other indexes that are used as benchmarks in the investing industry. For instance, the Bloomberg US Aggregate Bond Index would be a good index to use to know how the bond market is doing, but a poor benchmark for international markets. The MSCI EAFE or FTSE 100 would be better alternatives for this. A closer comparison would be the Russell 2000 compared to the Wilshire 5000, but still not apples to apples, since the Russell 2000 is for small companies and is more volatile, while the Wilshire is meant to be a broad-based representation of the domestic investment market. While this can be confusing, it is important to know what you may be comparing your investable life savings to and ultimately could be using to make very important decisions. With all the indexes to pick from, the most widely used are the Dow, S&P 500, and the Nasdaq. All are used to gauge the equity market, or stock. But as noted before, not the same. Besides the vast difference in returns between the three this year, there are other differences. The wide discrepancies of returns are due to what they are representing. The Nasdaq is heavily made up of Technology stocks. Its high return makes sense since the Technology sector of the market is up 40.7% this year according to Franklin Templeton. While investors enjoy those returns in a good year, the same sector was down over 30% last year. The middle ground index, S&P 500, is made up of a more diversified lineup of companies but is Capitalization Weighted (so is the Nasdaq), or Market Cap weighted. Essentially, what this means is that bigger, more valuable companies are given a bigger percentage of the Index. This is calculated by multiplying the outstanding shares of the company by the price of one share. So, today the S&P 500 is up over 14% but the weighting is overweight to Technology and bigger, more valuable companies like Apple, Alphabet (formerly known as Google), Microsoft, and Amazon. These companies are up between 32-50% for the year and make up a large part of the index, skewing the average. These companies were also down 30-50% last year creating quite a rollercoaster for the past two years and a feast or famine situation. Compare this to the steady Dow Jones and its low return for the year, which is only 30 companies (which many people think doesn’t reasonably represent the vast market). This index is Price Weighted, which is calculated by adding all share prices and dividing that by the amount of companies. This difference, and that it also excludes many stocks that are in the S&P, especially Amazon and Alphabet, accounts for the discrepancy of returns. Comparing a portfolio to any of these indexes is not a bad thing but should be done in the right context. Rarely an investor’s portfolio is identical to one of these indexes. Their tolerance to risk is probably not as high to weather the down years as well, creating a risk of selling at the most inopportune time. A diversified portfolio tailored to the investor and their goals is a time-tested approach, and when partnered with accurate expectations for fluctuations, it is an excellent way to achieve one’s goals for themselves, loved ones, and causes they hold dear. It’s easy to see a person’s money and investments as numbers and percentages, but it is important to remember to see it as resources to accomplish meaningful things and hopefully create cherished memories. Written by Leon Bennett, CFP®, Chief Operating Officer, Majestic Financial, Financial Consultant, RJFS Disclosures: *Any opinions are those of Leon Bennett and not necessarily those of RJFS or Raymond James. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. *Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification mark CFP® in the United States, which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements. *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 Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. *The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. *The Wilshire 5000 Index is an unmanaged index of 5000 stocks traded on NASDAQ and the exchanges. *The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. *Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. *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. *The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. This is not just a proverb, but a statement that Brandon, Leon, and I have heard from clients and prospective clients our entire career. Most of the time it’s used to explain to us that the person feels the need to have multiple investment accounts at different offices and even banks. Let’s examine this piece of advice to see whether it really is applicable to a portfolio and/or money manager.
First, let’s agree that applying only to Harvard after graduating from high school may create disappointment. Let’s also agree that setting your sights on the CEO corner office right after your college graduation may be a little premature. Both of these are examples of situation where exploring multiple options will help you get a step up in life. Second, let’s agree that there is no rule that you must date many people before finding your true love. Many clients have been dating their middle or high school sweethearts for 50 years – and never dated anyone else. My own sister has been married for 33 years to the first man she ever dated. Yet for every person who finds love at first sight, there’s someone who found love in their second or third marriage. Finally, many people consider themselves to be well rounded individuals because they have many skills, interests, hobbies, and friendships. They say they enjoy running and reading (hopefully not at the same time), watching the kids play soccer, going shopping with friends, wine tasting and travel. All of this sounds like fun to me too (with the exception of the wine and shopping). However, if most people were being honest and they had three hours where they could choose just one activity, it would be an easy choice. This is because while most people do have a variety of interests, they also have a preferred interest. Why am I pontificating on this topic? If we can accept that sometimes it’s good to put eggs in different baskets and sometimes it’s better to keep them together, why do so many people believe that it’s a hard and fast rule to keep them separate? And what does this mean in the investment world? I believe the reason for this confusion is based on a misunderstanding of what it means to have all your eggs (investments) in one basket (financial firm). Many people believe that hiring multiple financial advisors mean they have more asset diversification. Or, on the other side of the coin, that having their assets with only one firm means that they have all their money exposed to the exact same risk. Often this is simply not true. This is not because all other financial offices pale in comparison to Majestic Financial. It’s just a fact that if the advisors or the firms that they work for have the same investment philosophy or line up, you may have multiple accounts with virtually the same risks and holdings. I have personally seen many portfolios where hundreds of thousands of dollars’ worth of investments were invested in mutual funds where 8 or 9 of the top 10 holdings were the same – often Apple, Microsoft, Google, and Amazon. And often the portfolio held these four companies as individual stocks too. So while your eggs are in different baskets, they are still identical. Another problem with placing eggs all over the county is that while your eating habits may change (kids may make you eat more daily than you used to) you are now spending time running around grabbing eggs. Of course, I’m talking about how your financial needs may change and you may need more or less risk to achieve your financial goals. But if only 3 out of 5 advisors are aware of this, what do you expect the other 2 to do to help you – and remember that you are paying all 5 of them regardless of what value they bring to you. At Majestic Financial, we want to be a very important part of a small group of people’s lives. We want you to have different eggs (style of accounts, individual investments, alternative investments) but have all of the chickens on the same farm. With three different advisors and a great staff, we can work together to help you achieve your goals while enabling you to evaluate the entirety of your assets in one statement. Please let us know what we can do to make you comfortable partnering with Majestic Financial. We’ll make sure the baskets are the right ones for you. Written by Sean Budlong, CFP®, AAMS, Chief Executive Officer, Majestic Financial, Financial Consultant, RJFS *Any opinions are those of Sean Budlong and not necessarily those of RJFS or Raymond James. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Yes, the word is fartlek. The term is unique and an attention grabber. It is also very useful, not only in its intended purpose as a form of exercise, but it’s structure and purpose can be implemented into everyday life and, of course, financial planning. Fartlek is a Swedish word meaning “speed play”. It is used by many sports teams for conditioning and to spice up running regimens. Instead of going on a run or jog, a fartlek consists of running with different speeds and is extremely flexible in its format. A sample fartlek track workout consists of sprint the straight away, jog the corner, do a set of pushups, sprint the straight away, jog the corner, do an ab workout, then rinse and repeat. It can also be added to the usual run around the neighborhood at a consistent speed then at the end sprint for a block, walk a block, sprint a block, and so forth. People do this for time or distance. The idea is the variation of speed and intensity. While enjoying a fartlek recently, I found myself thinking about my day and the “to dos” that needed to be accomplished. It hit me that fartleks aren’t just a more enjoyable way of running but could be implemented as a way of life. I know that may seem biased and a little much (especially if you just heard of fartleks two minutes ago based on your reading speed), but it does hold some truth. Throughout life, no matter what stage, there are things that need to be completed. Some of these are enjoyable and some are not but they all need to be checked off the “to do” list. Things that just need to get done and don’t have to be perfect, can be sprinted through. Things that are enjoyable, purposeful, and worthwhile, please allow yourself some grace, walk through those times, and soak them in, because you may not get them back. Life is rarely consistent. Everyone is different with unique situations; financially, professionally, family and otherwise, and things change. Easily jogging through life doesn’t exist. There are speed bumps and hurdles. Some are easier to maneuver than others but having a plan when to sprint, run or walk can be paramount, not only for a workout but for anything that is important in your life that is worth dreaming about and worthy of your best effort.
When developing a financial plan, there is a process that we follow. We meet with people and have robust discussions about their goals, wants, and wishes for not only them, but their loved ones, causes they are passionate about and things that are overall important to them. After knowing this, we talk about what they currently own to help them reach their goals, assets, and what may need to be accumulated and exactly how to go about doing this to turn their dreams into reality. We lay a roadmap out to help achieve their dreams. Some action items can be completed quickly and implemented immediately, while others take years. Life isn’t a jog at a constant speed. Sometimes we sprint though sections and sometimes we must catch our breath and walk for a bit. The important part is to always move forward, no matter what the distractions, news stories, market swings or speed bumps are. Please let us know when we can help you or your loved ones develop a plan to achieve what is important or to mitigate a risk (that you may or may not know about) that could derail an already established plan. Written by Leon Bennett, Chief Operating Officer, Majestic Financial, Financial Consultant, RJFS *Any opinions are those of Leon Bennett and not necessarily those of RJFS or Raymond James. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Have you ever checked the 10-day forecast and saw it looked like gorgeous weather, so you planned a bunch of outdoor events excited to have beautiful temperatures and sunny skies? Then in actuality, it happened to rain 7 out of those 10 days including severe thunderstorms on one which derailed all your plans. Welcome to the concept of volatility. Sometimes even with the best laid plans, you can't predict what will actually happen with 100% certainty. The weather is one of those things that we like to try to think is set in stone when we see the 10-day forecast, but as we have all experienced before, especially if you live in Michigan, it can change on a dime, unexpectedly and for unforeseen reasons. With Michigan weather, most of us know to prepare for some unexpected changes in the forecast. That's why we set up a tent for the graduation party, bring a poncho to the football game, and make sure there is indoor seating at the reception. These are ways we can mitigate the potential damage or disappointment that comes with volatile weather.
Just like the weather, the market can also have periods of volatility, and it does, we just aren’t as used to them. As steady as its growth has been for the past decade, we are now experiencing extended volatility this year. As of May 20, 2022, the average annual return for the S&P 500 for the past 10 years is 11.65%. As of that same date, the S&P 500 is down almost 20% at 18.14% for the year. We haven’t seen that very much and human psychology is built to think in a perspective of a, “what have you done for me lately”, type of mentality. Sometimes investors forget that only a little over two years ago, when the whole world shut down in March of 2020, the market went down 34% in a one-month period. People remember this, but not as much as when it was happening because the sting to that memory was overshadowed by the all-time highs the S&P 500 recorded since then. But now the all-time highs are replaced with a current loss, and no one will be able to miss knowing about it due to the ongoing anxiety, fear and overall negativity that we are bombarded with on a daily basis from multiple sources. In the Psychology world, this can be described by a term called “Negativity Bias”. It’s the effect of negative comments, results, events and so forth having a more powerful reaction on us than positive ones (Verywellmind.com, “What Is the Negativity Bias?”, Kendra Cherry, updated April 29, 2020.). You may have been praised for work you have done or something of the like multiple times, but one snarky remark or hurtful criticism erases all the positive feedback, and a person may dwell on that a lot more than the uplifting comments. Same thing applies in the market. The S&P 500 can average 11.65% annually for 10 years, but are people usually focused on that, or the fact that it is down over 18% currently, over a little under five months? Same goes for the weather, people complain when it is too hot, then it is too cold, too much rain, not enough rain, etc. We are all human and have concerns, whether it is about plans that may be affected by the weather, plans for retirement that may be affected by the market, a financial plan that is being stressed currently by various factors or a total lack of a plan. The important thing to be mindful of is to take inventory of what you have control of and how to mitigate the risks that may arise, so the good times can be enjoyed, and the tumultuous times can be a little less stressful. After all, as there are more sunny days than stormy ones, there are more positive times in the market than negative ones. Written by Leon Bennett, Chief Operating Officer, Majestic Financial, Financial Consultant, RJFS *Any opinions are those of Leon Bennett and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. *The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. |
This blog is a collective effort from the Majestic consultant trio, Sean Budlong, Brandon Wilkins, and Leon Bennett.
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