Despite the challenges we’ve faced in 2020, we’re likely to end the year on at least one positive note—equity markets at home and abroad have performed well this year, for the most part, and many market indexes remain near their all-time highs. As the media celebrates every new market milestone, you may be asking yourself, “Why is my portfolio underperforming?”
First, Consider The Context
There’s no shortage of ways to access financial news these days. Most of us have all the information we’ll ever need right in our pockets. Having this ease of access is fantastic in many ways, but it can also be deceiving when we’re constantly hearing how well markets are performing without considering the broader context.
Let’s take for example, the Dow Jones Industrial Average. One of the most commonly followed market indices, the Dow was first calculated in 1896 and is a price-weighted index comprised of 30 stocks. As shown in Exhibit 1, the stocks that make up the Dow account for only 15% of the total global market value. The methodology constraints associated with the Dow result in it not holding four of the top 5 largest stocks in the world – Microsoft, Amazon, Alphabet (Google), and Facebook. Nonetheless, nearly every app and media outlet use the Dow as a proxy for the U.S. stock market.
Wall Street and the financial media will also often cite the S&P 500 when depicting how the stock market has performed. While it is widely agreed upon that the S&P 500 is an adequate representation of the US large cap market, it still represents less than half of the total global market value, as illustrated in Exhibit 1.
Exhibit 1: Measuring the Market
S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Top 5 stocks for each source measured by market capitalization.
- Dimensional US and Global stocks represent the list of tradeable stocks as of August 31 within Dimensional portfolio management systems. Weights given are market capitalization based weights, with securities capped at 5% maximum.
- Source: https://link.edgepilot.com/s/4d86da42/bFknrd9kAk2V_KfkCsy1Sg?u=https://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average
- NASDAQ is the set of securities listed on the NASDAQ stock exchange as of the given date, at market capitalization weights. Eligible securities include common stocks, tracking stocks, and ADRs.
Remember Your Objectives
As an investor, it’s important to understand that when someone refers to “the market,” this can be vastly different than your portfolio. For one, many clients have an asset allocation that includes a mix of stocks and bonds; however, the media tends to focus primarily on stock market performance. Additionally, investors in pursuit of higher returns may have exposure to different asset classes and investment styles, such as small cap and value stocks. While the Dow Jones and S&P 500 may represent how the large cap markets are performing, investors may want to diversify outside of large cap stocks to reduce risk and increase the possibility of outperformance over time.
Finally, many clients hold a globally diversified portfolio. By expanding the investment opportunity set beyond their domestic stock market, investors may improve the reliability of outcomes. Since most of us are based in the US, we tend to hear about the U.S. market more than other financial markets.
For these reasons, what the financial media is reporting may not be the best barometer of what is happening in the overall market nor your personal portfolio. Rather than unconsciously anchoring investment performance to what is being shown in the media, you should take solace in knowing that we have developed an asset allocation that is suitable based on your unique needs and preferences.
Stay Informed, But Stick To Your Plan
My best advice: by all means, read the news to be an informed citizen. However, if you’re constantly asking yourself, “Why is my portfolio underperforming?,” consider the broader context and remember why you have a financial plan in the first place. In other words, don’t let the media inform your investment decisions.
Of course, if you’d like to discuss your investment portfolio in more detail or have general concerns about the markets, please don’t hesitate to get in touch. We are happy to help.