Dramatic market turbulence has been common in 2020, and you can't help but hear about the frequent ups and downs of the Dow Jones Industrial Average or the S&P 500 index. The performance of these major indexes is widely reported and analyzed in detail by financial news outlets around the nation. Both the Dow and the S&P 500 track the stocks of large domestic companies. But with about 500 stocks compared to the Dow's 30, the S&P 500 comprises a much broader segment of the market and is considered to be representative of U.S. stocks in general. These indexes are useful tools for tracking stock market trends; however, some investors mistakenly think of them as benchmarks for the performance of their own portfolios.
It doesn't make sense to compare a broadly diversified, multi-asset portfolio to just one of its own components. Expecting portfolio returns to meet or beat "the market" in good times is usually unrealistic, unless you are willing to expose 100% of your savings to the risk and volatility associated with stock investments. On the other hand, if you have a well-diversified portfolio, you might be happy to see that your portfolio doesn't lose as much as the market when stocks are falling.
Different asset classes that tend to perform differently under different market conditions. An appropriate mix of stocks, bonds, and other investments depends on your age, your risk tolerance, and your financial goals. Therefore, there may not be a single benchmark that matches your actual holdings and the composition of your individual portfolio. It could take a combination of several benchmarks to provide a meaningful performance picture. There are hundreds of indexes based on a wide variety of markets like domestic or foreign, asset classes like stocks and bonds, market segments like large cap or small cap and styles like growth or value.
Seasoned investors understand that short-term results may have little to do with the effectiveness of a long-term investment strategy. Even so, the desire to become a more disciplined investor is often tested by the arrival of your quarterly account statements. Making decisions based on last year's — or last month's — performance figures may not be wise, because asset classes, market segments, and industries do not always perform the same from one period to the next. When an investment experiences dramatic upside performance, much of the opportunity for market gains may have already passed. likewise, moving out of an investment when it has a down period could take you out of a position to benefit when that market segment starts to recover.
There's nothing you can do about the global economic conditions or the level of returns delivered by the financial markets, but you and I can control the composition of your portfolio to help it match what’s appropriate for you and your circumstances.
[This information has been gathered from sources believed to be reliable, but Brooklight Place Securities, Inc. cannot guarantee the accuracy of this information or the reliability of these sources. This information in this Blog is not intended as legal or tax advice, consult your attorney or tax advisor regarding such matters.]