Unless your investment account owns all 500 stocks in the S&P 500 in the same proportions as the index, your account CANNOT match the index. And, if your goals call for less volatility than the overall stock market, you will likely own some fixed income investments and a variety of different kinds of stocks in a diversified portfolio.
Some investment professionals consider a diversified portfolio as the best strategy to achieve consistent growth over time with minimal volatility. As the markets move forward, different parts of the economy prosper at different times. Since no one has reliably predict these shifts in the economy, the idea is to own investments in all sectors of the economy all the time.
And, this means that you may never have ALL your investments in the exact corner of the stock market that is hot. But, you may never completely miss out on growth in the market either. It's a trade-off designed to deliver long-term success.
As this chart shows, a diversified portfolio (asset allocation in this chart) may never have the best return in a given year, but it may never have the worst return either. The goal is to get above average returns with below average volatility.
Remember your goals
If your investments are intended to provide for your retirement income that will start 10 or more years in the future and run for 40 years after that, then your priority should be on long term growth. Don’t let the constant buzz and chatter of the financial media distract you. Daily hot news is often about short-term outcomes and this can be a big distraction.
Managing the distractions and focusing on goals, is a big part of the work an independent, fee-only, fiduciary financial planner does. She is obligated to put your interests first in constructing a portfolio that helps you meet your goals.
By taking a larger view of your portfolio as a whole you get a much clearer investment perspective and a reminder of some of the fundamental truths of investing:
-the markets are random—it's unlikely to time the market with any degree of consistency;
-risk and returns are related—adding higher-risk elements to your portfolio may improve long-term performance, but the more you stretch for high returns, the greater the risk of a sharp decline from time to time;
-and, over the long term, a diversified portfolio is designed to yield higher returns and avoid more of the -declines than a single investment or market segment.
As an investor you need to ask yourself: Would you rather be mildly disappointed that a portion of your portfolio underperformed another, or massively disappointed that you guessed completely wrong by investing in a single market segment at the wrong time?
If this article has you wondering about your portfolio's construction, contact my office for a VISIT. I love to review portfolio with new people.
The opinions of the author are not necessarily those of Farm Futures or Penton Agriculture.