Many investors are concerned and perhaps a bit anxious because their portfolio returns weren’t as high as the return of “the market” last year. Don’t panic, otherwise trouble stands ready to pounce.
Remember that what we hear from the media most often is the performance of the Dow Jones 30 Industrials and the S&P 500, both narrow slices of the global market. Still, the familiarity of both indices makes it easy to assume they represent the health of stocks worldwide.
The Dow and S&P both represent the US large company asset class, and both did well in 2014, turning in the highest return of all broad asset classes, with the exception of US REITs (real estate investment trusts). So, if you had – which you should – a reasonable degree of diversification in your portfolio (small companies, international stocks, high-quality bonds, etc.) your performance may very well have come in below the returns showing up on the news. Again, don’t fret.
Remember the 2000s…a “lost decade” of performance for the S&P 500. Remember 2008, specifically, when the S&P 500 fell 37% in not much more than six months. Diversification is your portfolio’s best friend, because no one – and I mean no one – knows with certainty which asset classes will be the top, or bottom, performers from month to month or year to year.
Industry studies, recently noted by Vanguard Group, suggest that many investors are assuming a level of risk not seen since 1999 and 2007. Both years were previous market peaks immediately prior to significant downturns. People tend to become euphoric in periods of continued positive return and accept undue risk when they feel their portfolio is not performing as it should. Just be careful.
It’s always worth getting a second opinion if you have doubts, and it’s also prudent to remember why you established the current allocation and holdings in your portfolio in the first place. If you don’t know, then you definitely need a second opinion! The original, and ongoing, strategy should be one centered on the pursuit of your long-term goals, not merely chasing return outside the context of any plan. Don’t panic. Ask good questions. Have a plan. Stay diversified.
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