The S&P 500 is 500 companies/stocks. The Dow is comprised of 30 large publicly owned companies based in the United States. That is it. This is hardly indicative of “the market.” The market as I see it includes domestic and international equities. It consists of large cap, small cap, micro cap; value and growth; emerging markets, emerging small and emerging value. Additionally, let us not forget about fixed income (short term to be prudently explicit).
Your portfolios hold multiple asset classes. More specifically, asset classes that have some historically validated. They are engineered so as to not be dependent on any specific asset class. This lack of dependency is designed to attempt to maximize return for a given level of risk. The goal here is to get an overall market return.
This approach, in conjunction with adding fixed income, is designed around risk mitigation and insulating you from the downside risk associated with holding one [or just a few] asset classes. The consequences of this more prudent strategy are that you should not see returns that are associated with the lowest performing asset classes. To the contrary, it would be an unreasonable expectation of investors to be hitting “home runs” associated with consistently being in the highest performing asset classes. What is a reasonable expectation is a return commensurate with that of the asset classes with which we invest.
Generally this strategy is rather unassuming and extremely palatable. Unless of course the highest performing asset class is the S&P 500 or Dow, both of which are remarkably in investor’s face on a daily basis courtesy of the media and their friends at cocktail parties. This is what we are dealing with now.
It is worth remembering that there will always be an asset class that is out performing all of the others (as well as one underperforming). When it is the S&P though, everyone notices. They notice due to media spotlight, it makes up a disproportionate percentage allocation of many poorly diversified portfolios, thus making the news sadly relevant.
While some may be inclined to get onto this train of seemingly skyrocketing returns the S&P has offered this year, the wise know that volatility works both ways. The risk is two-fold. Now that the S&P has appreciated, there is a legitimate risk that this ride is over, and that any material change to shift resources in this direction may be poorly timed. In other words, the ship may have sailed. This is the risk of market timing at its very core and the reason actual investors returns frequently do not match fund performance (as evidenced year after year in Dalbar’s Quantitative Analysis of Investor Behavior studies). Investors see an asset appreciate and then buy [too late]. Once in, they frequently get the luxury of the ride down and then sell for a loss. Then, they look around for another hot asset, lather, rinse, and repeat.
Discipline is not for the weak, but success is the long term reward for its maintenance.