Why is my portfolio trailing the market?


The US stock market as measured by the S&P 500 by the end of November had registered 48 new highs in 2014, the same as in 1929 (Financial Times, 12/3/14). The gains, however, were increasingly narrow with large company stocks (as measured by the S&P500) up 13.98% through the end of November, but small company stocks (as measured by the Russell 2000) up only 1.99%. Here is where many investors likely have a major concern and we have a slightly different one. Your concern might be that because your investments have broad diversification beyond large caps, you may have significantly trailed US market returns. I understand the frustration of not keeping up with what “the news” calls “the market.” Our concern is that by seven measures of market valuation all of them show a market that is significantly overvalued. In fact, most place the current market as the most expensive except for 1929 and 2000! If you measure all countries by what is known as the Cyclically Adjusted Price to Earnings Ratio, the US has the second most overvalued market in the world after Denmark. This doesn’t mean the US market has to crash; it means the market’s gains for the next 6-10 years may be very modest.

What’s my point? A well-diversified portfolio strategy is not necessarily designed to get you all the upside each and every year. To do that, you would have to accept that you will also get all the downside. As a reminder, the 2008 crash was 57% from peak to trough, the 1929 crash was 89%, and the Japanese stock market is still down 55% from its peak set in 1989! (Yahoo Finance)

At our firm, our job is to help our clients create plans to prudently grow and protect their wealth. Therefore, we employ a three-pronged investment approach: 1) Set an appropriate investment objective to put up the “guardrails” on their stock exposure, 2) Diversify broadly between and within traditional stocks, real assets, fixed income, and alternative strategies in order to both broaden the opportunities and also to potentially reduce the risks, 3) Depending on the account type, use our WealthProtect System to potentially limit deep market losses.

Think of our approach as the tortoise, rather than the hare. It may appear slow at times, but by sticking to the course it has a greater chance of reaching the finish line than the emotional, bouncy hare.

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