Market Performance

There’s always a lot of focus by investors on the S&P 500. In 2023 it has performed relatively well. The S&P 500 though tells only a small piece of the story in 2023.

Contrary to the performance of the S&P 500, the year-to-date performance of the 7,065 stocks listed on the NYSE and NASDAQ Exchanges (essentially all U.S. stocks) is down an average -0.61%. The S&P 500 is higher only because a very small handful of very large stocks have done very well (larger stocks drive the performance of the S&P 500) while the average of all other stocks have, obviously, not performed as well.

Source: www.YCharts.com, all stocks on NYSE and NASDAQ as of 9/25/2023.

Not only has the average stock performed poorly so far in 2023, bonds have also lost value as the Federal Reserve continues to raise interest rates. Mid-term U.S. Government Bonds, those with an average maturity of 7-10 years, are down -2.41% year-to-date as measured by ETF symbol IEF. Long-term U.S. Government Bonds have performed even worse falling -8.49% (ETF symbol TLT).

The S&P 500 as a Portfolio

When the S&P 500 performs like it has in 2023, it can be tempting for some investors to consider abandoning everything else in their portfolio. One problem with this idea is that 99% of investors simply do not have the risk tolerance for this!

First, an investment in only the S&P 500 does not make for a diversified portfolio. It is 500 stocks but they are only U.S. stocks and larger in size. There are 1000’s of additional U.S. stocks and 1000’s of international stocks NOT in this index let alone bonds and other investments that would be in a diversified portfolio. An investment in the S&P 500 is best as just one component of a diversified portfolio.

Second, the S&P 500 alone in a portfolio, because it is not a diversified portfolio, has a very high risk profile. Based on two of the industry’s most utilized risk measurement tools (Nitrogen Wealth and Morningstar), only about 1% of investors have a risk tolerance high enough to invest in a portfolio with such high risk. 99% of investors simply cannot tolerate the volatility and deep losses the S&P 500 has delivered over the years.

Diversified Portfolios

Investors tend to understand that higher risk tends to deliver higher returns. Of course this is generally only true over the long-term. During periods of market declines, higher risk comes with worse returns (for example, during a bear market a higher risk investment or portfolio tends to lose more money than a lower risk investment or portfolio).

Diversified portfolios of nearly all kinds are generally not expected to keep up with the performance of the S&P 500 because diversified portfolios generally do not have the same risk. At the same time, diversified portfolios are not expected to lose as much during periods of market declines. This is a tradeoff most investors embrace. The goal generally then for investors is to determine their tolerance for risk and have a portfolio that matches this risk profile.

Our clients’ actual performance as well as our research have shown that our Super-Diversified Portfolios have performed better than more traditional, and generally less diversified, portfolios. We compare our actually client performance to an index of 300,000+ wealthy investors’ portfolios managed by 120 professional managers (ARC Private Client Equity Risk Index). Portfolios in this index had an average allocation of 65.94% to equities (stocks), 17.20% to fixed income (bonds), 16.86% to Other as of September 26, 2023 (these are higher risk portfolios and would be expected to perform well over time).

Since the inception of our Super-Diversification in January 2010, clients in our Super-Diversified Growth Portfolio (85%+ of our total clients) have achieved a 9.26% compounded annual return as compared to the ARC Private Client Equity Risk Index up only 6.23% compounded annually during the same time. A compounded annual return difference of more than 3% over 12+ years is huge with the cumulative, or total, return during this period being +233.29% for Super-Diversification and +130.11% for the ARC Index!

Not only has Super-Diversification performed better since 2010 but it has done so with less risk. The volatility, a key measurement of risk, of the ARC Index has been higher than our Super-Diversified Portfolios. Furthermore, during periods of market losses (the table above highlights all periods since 2010 when the S&P 500 has fallen more than -10%) Super-Diversification has performed much better than the ARC Index in 3 of the 4 periods. For example, during last year’s bear market when the S&P 500 was off -23.9% at its worst point, our Super-Diversified Portfolios were down just -9.5% while the ARC Index fell -24.9%. The one period, in 2018, when the ARC Index held up better than our Super-Diversified Portfolios the difference was less than 1%.

Although our Super-Diversified Portfolios have outperformed the ARC Private Client Index by a massive margin long-term, it does not mean that Super-Diversification outperforms every day, week, month, or even year. That’s just not possible.

Year-to-date through the end of August, Super-Diversification was up +4.9% while the ARC Index was higher by +15.4%. This is not unusual. For example, in 2020 Super-Diversification gained +5.4% while the ARC Index was higher by +16.1%. That underperformance of Super-Diversification in 2020 was then followed by two years of outperformance that more than outweighed the 2020 disappointment.

The performance of Super-Diversification has lagged behind so far in 2023. It’s disappointing but expected periodically. That’s simply the reality all investors must accept. In spite of this short-term period of underperformance, Super-Diversification has delivered over the long-term and is fully expected to continue doing so!

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Any specific securities or investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own situation before making any investment decision including whether to retain an investment adviser.

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions.  Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. This content was created as of the specific date indicated and reflects the author’s views as of that date. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results.  Any comments about the performance of securities, markets, or indexes and any opinions presented are not to be viewed as indicators of future performance.

Investing involves risk including loss of principal.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. For more information on specific indexes please see full disclosure here.

Any charts, tables, forecasts, etc. contained herein are for illustrative purposes only, may be based upon proprietary research, and are developed through analysis of historical public data.

All corporate names shown above are for illustrative purposes only and are NOT recommendations.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk.