Remember the first time you saw Google Earth zoom in from above Earth to a specific location? The fascination with a satellite view from space appearing to zoom in to pinpoint an exact location? I love the idea that you can zoom in to any place on earth. Pretty incredible.
It’s kind of the reverse when you are thinking about your investment portfolio. Most of us focus on what is going on in our lives today, what’s happening in our country and with the biggest US companies. Media reports on what “the market” is doing focus on the 500 largest companies in the US – those represented by the S&P 500 index. That tells you what the S&P 500 is doing today, but it is not THE Market. Even less helpful is the Dow Jones 30 Industrials Average as a benchmark for our personal investments. Likely, you own shares in one or more of the thirty companies that make up the Dow, but what portion of your portfolio do those shares represent? In a broadly diversified global portfolio, it’s likely a pretty small percentage. You probably have a higher percentage in the S&P 500, (which includes all the companies that comprise the Dow).
Many folks stop there with their investment portfolio and call it good. They have a few large American company stocks, or perhaps a somewhat more diverse mutual fund owning large U.S companies, or maybe even more diverse, an S&P 500 Index fund and their portfolio is complete. Broad diversification, however, involves thinking bigger and broader than our own country and its largest companies. After all, over time it’s the small companies of our country and the rest of the world that have historically provided the most growth. A broadly-diversified global portfolio includes large and small, value and growth companies from the US as well as developed and emerging foreign markets around the world.
Just a reminder to “zoom out” the next time you think about your own investments or begin to be either very worried or very complacent by the talking heads’ view of what “the market” is doing or likely to do. Look at the bigger picture. Practice the “zoom out” first and then zoom in to see if your portfolio is constructed in a manner that takes advantage of equity markets of the world at large along with a suitable portion of fixed income based on your time horizon for distributions. But that’s a topic for another day!
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