U.S. Stocks Rise 2.1% For The Week, But Don’t Lament Being Diversified
The Standard & Poor’s 500 stock index rose 2.1% last week, lifted by better-than-expected earnings reports from tech giants Amazon (NASDAQ: AMZN ), Microsoft (NASDAQ: MSFT ) and Alphabet (NASDAQ: GOOG ) (NASDAQ: GOOGL ). When trading closed on Friday, the S&P 500 stock index had erased all of the losses sustained since the correction of late August-early September, when the index declined by as much as 13.4% from its high. The U.S. bull market, now over six years old, last week was going strong. Ironically, however, all this good news about U.S. stocks can be a little frustrating to diversified investors because it makes prudent, diversified investors look like laggards versus the S&P 500. So now’s a good time to remember that diversified investors won’t ever perform as well as a hot asset class or as bad as the worst asset class. (click to enlarge) This chart illustrates how the S&P 500 outperformed a broad range of 13 assets classes in the five years ended September 30, 2015. The index of U.S. blue-chip, publicly-held companies gained 87%, a very strong gain for a five-year period. The S&P 500 was driven higher because the U.S. economy rebounded more strongly from the global debt crisis and the Great Recession. The return on the S&P 500 was significantly better than most of the other asset classes in this diverse group of 13 types of investments. It would be natural to lament not concentrating your portfolio on U.S. stocks instead of building a diverse group or asset classes. It’s frustrating not performing as well as the S&P 500. However, that’s not how strategically investing for the long run and using Modern Portfolio Theory works. Being diversified means, by definition, not placing your entire portfolio in any single asset class. You diversify because no one can be certain that the next five years will be as good for American stocks as the last five years. Owning a broad range of asset classes means you won’t ever perform as well as the No. 1 asset class. But it also assures your portfolio won’t perform as poorly as the worst asset class that you hold. Diversification and rebalancing periodically, which is the core of Modern Portfolio Theory, provides a strategic course of moderation. The idea is to avoid the big swings of being concentrated in one or two asset classes. Concentrating a portfolio in U.S. stocks could have given you bigger gains, but it can also work against you and land you with larger losses when stocks are out of favor, and can make it more difficult to stay the course when stocks are knocked down in a correction or bear market. So don’t kick yourself if all your money was not riding on U.S. stocks the past five years. While past performance is not a guarantee of your future results, it is also true that a long-term investment strategy cannot fairly be measured against short-term trends.