Reality Check..... Beating the S&P
Submitted by Ballard Associates on April 12th, 2015Portfolio diversification is just a fancy way of saying, “don’t put all your eggs in one basket”. When all of our eggs are placed in the same basket they are all subject to the same ups and the same downs. One way to weather today’s turbulent markets is to have a properly diversified portfolio. When your portfolio consists of stocks, bonds, real estate, hard assets, and cash the portfolio volatility may be relatively lower than the current market volatility. By strategically spreading the eggs across many different baskets, you may achieve a varying level of control on your investments. This technique may allow an investor to obtain some bearings in an environment that is always changing. Informing you about the ever changing markets are the “talking heads” at Fox, CNBC and CNN. They manage to generate some pretty high ratings by amplifying these everyday occurrences into major events to keep you glued to the tube, convinced that the next over opinionated analyst may hold the fate to your financial future. More often than not, the sensationalized market conditions and accompanying advice pertain to the very few. However, the “talking heads” are quite skilled at making the viewer feel that the advice and commentary is catered specifically to them. Some of these shows target both the day trader and the individual investor, then add in the ridiculous gimmicks, lights, and array of sound effects and the very serious matter of financial investing becomes a televised interactive casino game for the most sophisticated adults.
When we chose to diversify our assets by spreading our eggs across many different baskets, the volume of the “talking heads” and the market becomes quieter and much easier to handle. Some market analysts speak of beating benchmarks and many are referring to the benchmark index which is the S&P 500[i]. However, as you’ll come to find out, that this competitive need to attempt to beat the S&P does not apply to individual investors, and certainly does not apply to those with a diversified portfolio. Asset allocation in a diversified portfolio consists of stocks, bonds, real estate, and cash that span many indices, sectors, and asset classes. The S&P 500 is 500 of the leading large cap corporations in America. The growth of this index is typically the largest by shear market capitalization. For an individual investor to attempt to compare their diversified portfolio designed to achieve goals specific to each investor, to an index of the largest corporations in America is like comparing apples to oranges.
[i] Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results. Diversification and asset allocation strategies do not assure profit or protect against loss