You 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.