Growing and protecting your hard-earned assets takes time, energy, and balanced emotions. At Summit Wealth Group, we feel that investing is simply the vehicle used to pursue a desired lifestyle. Retirement is the main goal for most investors, so I will approach this article with that perspective.
Evaluating investment performance is an important part of the process, but you must be careful not to oversimplify the situation by comparing performance to a common index. The Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of the 500 large companies having common stock listed on the NYSE or NASDAQ exchanges. Many equate the performance of the S&P with investing success, probably because it is so easily tracked.
However, excluding other benchmarks can cause you to lose sight of your true investment goals. It can also cause you to make emotional investment decisions in an effort to “beat the market” instead of pursuing your specific objectives.
This is what I call “S&P Envy”, and many investors are currently “green” with it. After nearly 8 years of a bull market in the U.S., the S&P has outperformed most risk-adjusted indexes. As I am sure you know, chasing an investment that has outperformed is a recipe for disaster.
The chart below illustrates why an investor chasing the S&P index would be disappointed in a diversified portfolio. The illustration shows a comparison between the S&P 500 index alongside four indexes designed to track investments at various risk levels, from Conservative to Aggressive. The Target Risk indexes include investments in different types of stocks and bonds in the U.S. and internationally.
As bull markets lengthen, the S&P 500 Index becomes less a representation of how investors "should" be doing, and more an indicator of how U.S. momentum stocks are performing. The superior performance of the S&P index is mostly due to the herd mentality of indexing and the easy-money policy of the Federal Reserve.
So, consider your true objectives, and remember that your portfolio is only a means to that end. Once you have a firm plan in place, then you can make a wise decision on how to track your progress. Do that, and you won't suffer from S&P envy.