Are You Comparing Apples and Oranges?

I recently sent an email to a client and then felt the bulk of the content may be helpful to all of my newsletter subscribers. Let me know what you think.

Many people think a good benchmark to use for comparing their own investment portfolio performance is the Standard & Poor’s 500 Index. Comparing your portfolio to the S&P 500, or any undiversified index, will almost always be unhelpful. It is likely there is no valid comparison whatsoever. Here’s why:

The S&P 500 is a very familiar stock market index for sure. However, it’s 100 percent large-cap stocks of U.S. companies. This means there is no portfolio diversification in the S&P 500. It represents only one asset class: domestic large-cap stocks.

  • There are no international stocks in the S&P 500.
  • There are no mid-cap stocks in the S&P 500.
  • There are no emerging market stocks in the S&P 500.
  • There are no bonds in the S&P 500.
  • There are no small-cap stocks in the S&P 500.
  • There are no commodities like gold, oil, silver, etc. in the S&P 500.

If you have a portfolio with more than just large company stocks of U.S. companies, then your portfolio bears no resemblance to the S&P 500. I’ve helped people make investment decisions for more than 27 years, and very few clients have ever wanted 100 percent of their investments in stocks, especially only one type of stock such as the S&P 500 has!

The asset classes listed above, and many more, may be in your portfolio. My bullet points may seem repetitive, however this is an issue that is easily misunderstood by the general public. The S&P 500 is not a diversified portfolio!

I don’t have any clients who want to place 100 percent of their investments in stocks. Therefore, to place 100 percent of their money in a S&P 500 index fund would be highly inappropriate as an investment. That’s why using the S&P 500 as a benchmark to compare your portfolio, which could contain 10, 12 or maybe 15-plus different asset classes, is equally inappropriate. To do so, would be comparing apples and oranges. Actually, it’s closer to comparing apples and watermelons!

Comparing the S&P 500 index, which is a single asset class, to a diversified portfolio has no validity. However, the S&P 500 can be useful in terms of comparing it to specific positions you may own in your portfolio in the same asset class.

Here are three funds we have used to represent domestic large-cap stocks (ticker symbols withheld and this does not represent an endorsement or recommendation):

  • Fund “A” (12.91% 5-year) (15.91% 1-year) (as of 3/31/2017)
  • Fund “B” (13.25% 5-year) (18.91% 1-year) (as of 3/31/2017)
  • Fund “C” (12.49% 5-year) (16.53% 1-year) (as of 3/31/2017)

The S&P 500 performance over the same time frame has been: (10.82% 5-year) (14.31% 1-year) (as of 3/31/2017). Our domestic large-cap holdings are significantly outperforming the S&P 500. However, I want to emphasize that focusing on past performance when investing often leads to “chasing returns” (buying high and selling low).

Additionally, our Investment Policy Committee reviews portfolio positions in a disciplined way every calendar quarter. This cannot guarantee success because successful investing cannot be guaranteed by any firm or methodology. Our access to institutional share class funds and investment alternatives reduces our clients costs relative to a client seeking to own the same fund by owning the retail share class.

Research, appropriate allocation, asset pricing, portfolio rebalancing, quarterly accountability and, of course, our knowledgeable, friendly staff provide a very strong value proposition, which is difficult for any other firm in our industry to compete with.

As a consumer seeking value for your money, it is tremendously helpful to know exactly what you are paying and what you are paying for. At no cost to our newsletter subscribers, we provide an initial case analysis so you are truly comparing apples to apples. This puts you in the driver’s seat with a better understanding of how the industry works and what to expect from different investments.

Let’s get acquainted!