The S&P 500 was up 21.8% in 2017 and is off to strong start in 2018. Here’s why you shouldn’t expect your portfolio to have the same returns, and why that’s not a bad thing.
2017 was a good year for stocks. In fact, all equity categories showed a gain with the exception of bear-market funds and energy funds.
In years like this, we like to remind clients that our expectation is not to mirror the returns of the stock market. Why? Because every client has a diversified portfolio based on their personal goals and risk tolerance.
By having a portfolio that includes stocks, bonds, real estate and cash, a portfolio may be diversified to weather the vagaries of the market to the extent of each investor’s risk.
For investors who were heavily weighted in stocks, 2008 was a frustrating year when the S&P 500 dropped 37%. That being said, those who had a diversified portfolio that included a portion of stocks, bonds, cash, and real estate, were able to mitigate some of their losses to an extent, as a result of that diversification. Having the anchor of fixed income and cash in a portfolio, in addition to real estate, can help round out a portfolio to help diversify it from risk.
We are firm believers at WealthChoice in the importance of a diversified portfolio.
While we can’t guess the future or the future performance of investments, we do know how assets and asset classes have performed historically. This knowledge helps us create portfolios intended to fit each client’s goals and risk tolerance better. In 2017 emerging markets stocks were up a whopping 37.28%, while US Stocks rose 21.13% and US Bonds, 3.54%. If you had not diversified your portfolio and had, for example, only US stocks, you would not have benefited from the gains in international and emerging market stocks. Likewise, in 2008, if you had not included bonds in your portfolio, you may very well have had much larger losses.
Diversifying among asset classes is important, but so is diversifying within each asset class. For example, while US Stocks as a whole were up 21.13% in 2017, large growth stocks returned 30.21%, and small value stock returned 7.84%. This range of returns illustrates the need to diversify within asset classes to broaden exposure.
What does all this mean for you?
When looking at your portfolio returns, keep in mind the goal of the portfolio and your personal appetite for risk. If you have goals that are short-term, you likely have less ability to weather market volatility, and your portfolio should be more conservative. If retirement is decades away, you can probably withstand more volatility; your portfolio may be more growth-oriented, which likely means more exposure to the stock market. Focus on your personal goals and risk tolerance when looking at your portfolio, rather than comparing it to a single index.
To learn more about how we help our clients invest for their goals, contact us at WealthChoice.
