While the S&P 500 remains near an all-time high, investors are looking at their portfolios and asking, “if the market is at all-time highs, shouldn’t I be as well?”  Not so fast.

While equity markets often move with some element of correlation, the last five years and especially the last one year has been truly exceptional.  As of October 7, the one year return of the S&P is basically flat at 1.84%. Compare this to the Russell 2000 Small-Cap at -7.9%, International MSCI EAFE -3% and the Emerging Markets index -0.66%.   If you extend this to five years the numbers are even more surprising with the S&P up a whopping 53.83%.  Compare that to the EAFE 6.18%, and emerging markets 0.30%. The commodity index is down 33.69% over the last 5 years! 

A Tough Ride for Diversity

For years, legions of investors have adopted the advice of noted passive index investors like Burton Malkiel and Jack Bogle.  While both championed the benefits of passive “buy and hold” investing, both were also careful to advocate that investors create a truly diversified approach to investing.  A thoughtful well-constructed portfolio might have consisted of Large Cap, Mid Cap, Small Cap, Bonds, International, Emerging Markets, Commodities, and many more categories. Neither would have advocated for a single country, single market cap approach to investing such as the S&P 500.   Needless to say, for a thoughtful well-constructed portfolio, it has been a difficult period indeed! 

Part of the story is playing out in the headlines today.  The global economy is slowing.  The IMF recently cut global GDP forecasts for 2019 and the recent strength in the U.S. dollar has sent shockwaves through the global bond markets.  German government 10-year bond yields are at -0.57%!   The U.S. Federal Reserve sensing the global implications made a significant reversal in policy by raising interest rates in December and yet lowering rates just seven months later.

Shockingly Large Cap Leads the Way

So where is this U.S. Large Cap outlier performance coming from? Surprisingly, these last five years have seen the largest of the large Cap lead the way.  Of the 500 companies in the index, the five year returns of the top 8 companies are Microsoft +211%, Apple +125%, Amazon +456%, Google +117%, Facebook +146%, Berkshire Hathaway +51.54%, Visa +241%, Johnson & Johnson +31%. 

Focus on Your Goals

In my 25 years of investing, I have largely ignored the phrase “it’s different this time”, perhaps this time it is. What should investors do instead? Instead of continuously chasing the S&P 500, investors should examine their individual goals and risk tolerance. Are they willing to take on the risks that come with achieving these returns by having a largely undiversified portfolio? Are they comfortable giving up some performance for reduced volatility? In these uncertain times, it may be better to leave a little on the table.

Have Questions? Ask the Experts.

Contact your Churchill Representative to ask for an opinion on a stock, an analysis on your outside portfolio, or even just a general question on the market. 

(877) 937-7110 

info@churchillmanagement.com

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