Message from Jon
As you probably guessed, I am a BIG proponent of client education, dialogue and collaboration. To this effect, this week I will attempt to educate or reinforce the index phenomena as I call it that can be a stumbling block for some investors.
It is easy to talk about the “stock market” as a thing with a single benchmark and universal understanding. It would be like when my wife talks about “all men” which to her credit she rarely does, since we both know that whatever statement follows is usually wrong.
First of all, a benchmark is meant to give a relationship and context to an investment strategy or portfolio. The DJIA is meant to be an example of the US economy and therefore has 30 companies that comprise its make up. Those are positioned in such a way as to represent a sector or aspect of our economy such as manufacturing or industrials and so on.
How many “benchmarks” are there? According to Morningstar, there are 19,687 different “indexes” that can be used to provide reference for portfolio managers and investors.1
The one that is MOST popular and used most inaccurately by investors is the S&P 500 index. This index is comprised of 500 of the largest publicly traded companies in the US markets. This index, like many others, is cap weighted, meaning that the bigger the company is, the more percentage of ownership or (weighting) it comprises of the index. For instance, Apple, Amazon, Facebook, Google and Microsoft represent 25% of the S&P 500 index and Nearly 45% of the NASDAQ.2,3
Why is this important? Because we lose one client a year to the phrase, “if I would have bought the index, I would have done better.” SIGH….so what you are saying is when you gave us your investment to begin with, you really wanted us to buy 5 stocks all in the tech sector and hold them?
Today, the markets are up and yet there seems to be a disconnect between the indexes going up and the percentage of stocks going up vs those going down as I reference below in the Chart. This is a prime example of what I was saying above in our comments.
Stock Market Chart 3/22/21
Keep in mind, at the end of your road…what matters is not rates of return or market conditions or anything other than do you have enough saved to walk away and live comfortably or not? If the answer is no, then focus on what you can do to flip that answer to yes and stop worrying about things that are beyond anyone’s control.
We are seeing what we figured we would see, and that is the market responding to the stimulus and remaining a positive place to be. We will be rebalancing portfolios again in April.
We should be expecting a correction in the near term since we could really use one, but with the stimulus yet to work through the system and the infrastructure bill on its heals, who knows when or how much the next correction may be?