We met an investor who jumped from strategy to strategy—from growth to value, from S&P index funds to NASDAQ index funds, from using a robo-adviser to picking stocks himself—and was never satisfied with his returns.
We believe investors should understand why they’re doing what they’re doing, which represents the planning side of investing, as opposed to what this investor was doing—chasing returns. We recommend creating a financial plan first to determine what is needed. Age, family situation, financial goals, employment, target retirement, and tax situation should all be considered when developing a plan. The plan then determines the portfolio allocation between growth and fixed investments. Growth investments include stocks, mutual funds, and exchange-traded funds, while fixed investments include Treasury bonds, CDs, and municipal bonds. Fixed investments are shielded from the volatility of the stock market because the money is needed sooner for spending needs, such as a child’s education, a dream home, retirement, or philanthropic giving.
We asked this investor if he was changing how he invested because he lost money, didn’t beat the S&P like he expected, or if his goals had changed. What is his “why”?
Everyone likes returns. We all enjoy seeing our financial statements increase every month; however, just because the S&P index goes up does not mean your portfolio needs to go up just as much. Your portfolio’s objective is to allow you to meet your financial goals. If a 7% return can fulfill your wishes, why chase a 12% return? Why take on the additional risk if you don’t have to? The key to growth is exposure to the market. We like to say the key is time in the market, not timing the market.
The S&P index is a benchmark meant to represent the broad market. It is market capitalization-weighted, so the bigger the company, the more influence it has on the index’s returns. For example, Microsoft has a market capitalization of $3.2 trillion, representing roughly 7% of the S&P. When Microsoft has a good day in the market, it affects the S&P’s return much more than News Corp., which has a market capitalization of $15.6 billion and represents only 0.01% of the index.
Still, you will often see an S&P fund or ETF as a core holding in many portfolios because it provides diversification, a strong historical performance, and simplicity for investors without the need to pick individual stocks or worry about market timing. While the S&P index is functional in broadly monitoring the market, it cannot do everything for every investor. If you rely on dividend income, an index heavily weighted in technology may not be the your best allocation model.
We believe investors should focus on their financial plan and how much is needed to achieve the goals they have set forth. Trying to get too clever with strategies, timing, or tactical moves can quickly run afoul. Again, why take on additional risk if it’s not necessary for success? We aim to design a portfolio that achieves quality returns that will satisfy the individual. You should not change your allocation just because another index outperformed.
If you have questions on how your portfolio is allocated, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the June 15,2024 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
