A diversified portfolio is difficult to own – it never feels like you are ahead, often leading to a feeling of regret. We start to wonder to ourselves, “Why am I losing money? I thought my portfolio was diversified?” or “Why does my portfolio always underperform? I am leaving too much money on the table.”
Source: Morningstar as of 6/30/20. †Performance is YTD as of 6/30/20. Diversified Portfolio is represented by 40% S&P 500 Index, 15% MSCI EAFE Index, 5% Russell 2000 Index, 30% Bloomberg Barclays US Aggregate Bond Index, and 10% Bloomberg Barclays US Corporate High Yield Index. Past performance does not guarantee or indicate future results. Index performance is for illustrative purposes only. You cannot invest directly in the index.
So why is owning a diversified portfolio so difficult? The short answer is due to a term coined by BlackRock called “S&P Envy”. This is the idea that when investors look at their portfolio’s vs the S&P 500 and it’s easy to see how this S&P Envy comes about. It’s the inability for investors to connect the dots of investment returns over various market cycles.
In a bear market, a diversified portfolio still loses money- that never feels good. Then in the bull market rebound you trail the index.
If you look at the chart above, you will see the S&P 500 vs a broadly diversified 60/40 asset allocation and if you break this twenty year period down into its individual cycles, you can see why it’s so hard to stay diversified.
For example, in 2008 you lost more than 20%, one of the worst years ever for a diversified portfolio. And then in the 9 years from ‘09 to’19, the diversified portfolio trailed US Stocks by 160%. Bringing this back to the historic first half of 2020, you then found yourself losing money yet again in a very sudden, very severe market drawdown.
You can see where this S&P Envy comes from – the diversified portfolio never feels like its winning. Lose money, trail the market, lose money, trail the market.
A diversified portfolio is difficult to own – it never feels like you are ahead, often leading to a feeling of regret. We start to wonder to ourselves, “Why am I losing money? I thought my portfolio was diversified?” or “Why does my portfolio always underperform? I am leaving too much money on the table.”
But the punchline is if you add up all these periods, the diversified portfolio actually works even when it feels like it’s losing. This kind of regret and not understanding why we build portfolios the way we do can lead to bad investment decisions.
TRUADVICE, LLC, is an investment advisor registered with the United States Securities and Exchange Commission. Registration does not imply any level of skill or training. TRUADVICE, LLC’s unique CRD number is 292482. You can obtain a copy of TRUADVICE, LLC’s firm brochure (Form ADV Part 2A) and client relationship summary free of charge by visiting https://adviserinfo.sec.gov/firm/summary/292482. TRUADVICE, LLC offers investment advisory services only where it is appropriately registered or exempt from registration and only after clients have entered into an investment advisory agreement confirming the terms of engagement, and have been provided a copy of the firm’s ADV Part 2A. This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, accounting, or other financial advice. TRUADVICE, LLC does not provide tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
Nick Gyeszat, CIMA®
Director of Strategic Planning
nick.gyeszat@truadvicellc.com
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