The Dow’s at a high, but...

Record Dow!  What Does That Mean?

With the Dow reaching record highs, what does that mean for investors and their portfolio returns for 2018?  Well…it depends on how much you have invested in U.S. Equities.  2018 is certainly an odd year with most asset classes diverging from the US Stock Market (fixed income and international equity indexes are down for the year).  Those with a truly diversified portfolio may feel as though they are missing out, but keep things in perspective, and don’t chase the short-term hot asset class, instead, stay diversified and disciplined. 

We saw an article over the past weekend that said pretty much this exact thing.  Here is part of that article.

Understandably, the investor sees the stock market reaching new highs, then they look at their portfolios and see either no gains, or a gain considerably lower than the one posted by the stock market. Indeed, the S&P 500 is up 10% so far this year, through August 31, 2018, and your portfolio isn't.

One answer, of course, is that your advisor never suggested that you be 100% in the stock market. They likely advised you to diversify into different asset classes to smooth your returns, and your nerves, over the years. So, comparing your overall performance to the stock market isn't fair.

In that case, what should your returns this year be?

Your personal investments are likely diversified into stocks, including the U.S. stock market, international stocks, and some emerging market stocks. You have some exposure to bonds, which have done poorly and produce tiny returns, and perhaps some commodities. Of all these assets, the U.S. stock market stands out as the star performer, and just about all of the other investments have suffered.

The only investor who would be up in double digits this year, is one who took a big gamble and said: "I'll put all my money into stocks. And I'm going to further bet on only the U.S. stock market, no international, no emerging markets." If you took that bet, you'd be up 10% this year. But of course, you didn’t and probably shouldn’t be.

No sensible investor would put all their assets in only stocks, which is likely to be the most volatile and risky investment in his portfolio. Besides, their financial advisor, and the client, would have a heart attack.

The Reality 

Let's suppose you did it anyway: you put all your money into stocks this year, sensibly diversified the way you always have. Your portfolio would probably look like this: (1) 50% U.S. stocks; (2) 35% international stocks; (3) 15% emerging markets.

The international and emerging market stocks have done very poorly this year for a variety of reasons, one being the strength of the dollar. Likewise, the emerging markets suffered, with added fears about trade sanctions, international economic turmoil, and the like.

How would your all-equity portfolio have performed this year? Through August 2018, you would have a gain of 3.6%, hardly the kind of return you expected for taking this big a risk.

These investment fantasies aside, let's get back to reality. Of course, your portfolio isn't invested only in stocks. You are likely to have a more traditional 60/40 portfolio, one that is invested 60% in stocks for long term growth, and 40% in safer bonds, both corporate and U.S. treasuries. One choice many advisors use is the Vanguard Intermediate Government and Investment grade bonds ETF (BIV) , a good combination of both types of bonds. This year, through August 31, 2018, that investment was down 1.48%.

Now let's reassemble your portfolio and see how you did. Summing up, your advisor put together a well crafted long term portfolio consisting of 60% equities for growth. The equity portion is divided into 50% U.S., 35% international, and 15% emerging markets. For the more stable portion of your portfolio, they recommended the Vanguard fund we just described. You had no trouble agreeing that this was a sensible long-term portfolio. So, what was your return so far this year? A mere 1.3%.

Yes, 1.3%. If you had done absolutely no investing this year and instead put your money into the Fidelity Money Market Institutional Fund, your return though August 31, 2018 would have been 1.22%, about the same as the return on your portfolio.


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