Don’t Use the S&P 500 as an Investment Performance Barometer

barometerYou just finished watching the market wrap-up on CNBC and saw that the S&P 500 was up significantly over the last quarter.  With this in mind, you eagerly await your quarterly investment statement expecting to see a huge jump in your portfolio. When the statement arrives, your portfolio does enjoy a modest bump, but the gains you expected to see are just not there. You reach for the phone and call your advisor, sure that there must be some mistake.

It is a question we hear occasionally, “Why am I not seeing the same growth levels that the media is reporting on the S&P?” The answer is quite simple – the S&P is not a good barometer for portfolio growth. As fiduciaries, our job is to help our client plan a diversified portfolio – one that will see steady growth over the long haul. This means, that while some funds may be put into the S&P, they are also spread over several other markets. To simplify this idea, when we plan a portfolio mix for a client, we typically divide it into four different investment buckets:

  • Large Cap Investments –U.S. Large cap companies are the big Kahunas of the investment world – they have market capitalization of $5 billion or more. This includes the S&P 500.
  • Small Cap Investments – These are smaller and riskier investments made up of 2,000 small businesses with $250 million to $1 billion in market capitalization. They generally have faster growth.
  • International Markets-equities of large- and mid-capitalization developed market equities, excluding the U.S. and Canada.
  • Emerging Markets – are composed of large- and mid-capitalization emerging market equities. This includes investments in global markets such as China or Brazil. These funds generally have fast growth, but they also can have an equally fast decline.

This mix allows us to create a diversified portfolio for our clients and helps us to create a more steady growth pattern and reduce risk. It is an effective method that, over time, offers the best opportunity for a strong and healthy investment portfolio. This is why your portfolio return may not measure up to the S&P 500 returns or it may outperform the S&P 500, it just depends on the markets. In essence, you must understand the growth trends in all four areas in order to have an accurate picture of your current investment mix.

For more information on creating an effective diversified portfolio, contact your investment advisor. Or, better yet, talk to one of the Financial Fiduciaries team members! Also, check out our recent blog “The Other Dimension of Risk” for more information on this topic.

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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