The S&P 500 Shouldn’t Be The Barometer Of Investor Success, Here’s Why
From: forbes.com
Far too often, individual investors measure the success of their investment portfolios, or the effectiveness of their financial advisors, relative to the performance of a well-known stock market index such as the S&P 500 Index or the Dow Jones Industrial Average Index.
While it is important for investors to have a tool to measure the success of an investment strategy against, it can be very misleading, and often misguided, if an investor chooses an index as their tool that is not consistent with their risk tolerance or investment objectives.
For example, the S&P 500 and the Dow are often quoted on television and by various media outlets when providing updates on the stock market. By doing this, the media is implicitly suggesting to investors that these indexes represent how the market is actually performing. Trouble is that not everyone has the same definition of “the market” and not every investor has a portfolio that is structured like “the market” – and probably for good reason.
In an Investment News article entitled, “When underperforming the S&P 500 is a good thing,” author Jeff Benjamin claims that investors have become programmed to dwell on the performance of a few high-profile benchmarks. Benjamin goes on to state that, “… a truly diversified investment portfolio should have returned less than 5% in 2014. It was that kind of year. Any advisor who generated returns close to the S&P was taking on way too much risk, and should probably be fired.”
The suggestion of having the financial advisor fired may be extreme, especially if an investor has instructed their advisor to build a portfolio to try and provide performance consistent with, or superior to, the S&P 500 (or the Dow) and recognizes the potential risk associated with that type of strategy. However, most investors do not have this large of a risk appetite and appreciate the benefits of diversification to help deal with market volatility if and when it occurs.
To this end, many of the growth-oriented investors that we speak with at Hennion & Walsh are interested in portfolios that are managed to help deliver a reasonable return while also providing for some downside protection. As a result, investors generally do not have that large of a percentage of their portfolio assets allocated to the one asset class associated with these two stock market indexes. This asset class is U.S. large cap. To this end, Michael Baker of Vertex Capital Advisors stated in the same previously mentioned article that, “The S&P 500 really just represents one asset class – large cap stocks…and most investors only have about 15% allocated to large cap stocks.”
Having all of their investment portfolios allocated to one single asset class, such as U.S. large cap, would have rewarded investors well since the last major market crash hit bottom in March 2009. However, this does not mean that this will always be the case going forward nor has it been the case historically.
