The stock market celebrated a stellar performance in 2017, witnessing the S&P 500 soar over 19 percent. Did your investment portfolio mirror this success? If not, it’s natural to feel a pang of envy. You might even contemplate overhauling your investment strategy, gravitating towards the buzzworthy companies that dominated headlines in 2017.
However, before you make any impulsive moves, consider this: just as browsing through your social media feed can trigger feelings of inadequacy about your vacation experiences, fixating on trendy investments may lead to reactive rather than proactive investment decisions—often detrimental in the long run.
So, what’s the antidote to investment envy? Let’s delve into some strategies.
- Maintain a balanced perspective on trending investments:
If you follow investment news, you’ve undoubtedly encountered numerous headlines hyping the so-called FANG stocks—Facebook, Amazon, Netflix, and Google (Alphabet). Additionally, consumer-oriented giants like Apple and Microsoft enjoyed significant gains in 2017.
Should you incorporate these stocks into your portfolio? Perhaps, but prudent investing principles advocate for their inclusion only within a diversified portfolio, and only if you grasp the volatile nature of rapid gains, which can just as swiftly reverse.
Case in point: during the 2008 financial crisis, when the S&P 500 plummeted by 38 percent, many of these trendy stocks experienced substantial declines, with some plunging by over 50 percent.
- Maintain perspective on a bustling market:
At the close of each trading day, media outlets report on “the market’s” performance, typically focusing on indices like the S&P 500 or the Dow Jones Industrial Average. However, it’s crucial to recognize the distinction between these indices—the S&P 500 reflects the aggregate performance of 500 major U.S. public companies, while the Dow represents just 30 companies.
Benchmarking your portfolio against these indices is only relevant if you exclusively invest in an S&P 500 or Dow index fund. If your portfolio includes other investments, it’s essential to understand that “the market” doesn’t equate to your specific holdings. While it’s valid to consider the market’s performance as a broad indicator of investment trends, resist the urge to feel envious if your portfolio underperforms or overly confident if it outpaces the market.
- Stay mindful of your benchmark:
When assessing your portfolio’s performance, the most pertinent comparison is against a benchmark tailored to your age, objectives, and risk tolerance. Specifically, it’s the average annual return outlined in your investment plan that serves as the ideal point of reference.
- Achieve a balanced approach:
Once you’ve determined your ideal asset allocation, leverage index funds to construct a diversified portfolio that captures overall market gains while also benefiting from the success of specific high-performing investments.
Investing in an S&P 500 index fund offers precisely this opportunity. While it provides exposure to the broader market as defined by the index, it also grants surprisingly significant exposure to the aforementioned top-performing individual stocks.
Here’s how: The S&P 500 operates on a “market capitalization-weighted” basis, meaning each company’s representation in the index corresponds to the value of its outstanding shares. Given the stellar performance of companies like Apple, Alphabet, Microsoft, Facebook, and Amazon in recent years, they hold a disproportionately large share of the index. For instance, these five stocks collectively constitute nearly 13 percent of the Vanguard S&P 500 index fund, VOO.
However, even if your ideal asset allocation is 100 percent stocks, it’s advisable to diversify beyond solely an S&P 500 mutual fund. Consider incorporating exposure to smaller companies through an extended market fund and international companies through an international fund.
Relying on headlines about rapidly growing sectors or trendy investments for benchmarking purposes can induce unnecessary stress and potentially hinder your returns. Instead, formulate and adhere to a plan that incorporates a realistic expected average annual return based on your unique circumstances and financial objectives.
Adopting the appropriate benchmarking strategy will not only enhance your portfolio’s performance but also promote your peace of mind.
