As annual reviews roll around for 2015, advisors around the country have the task of explaining how their portfolio strategies lagged so badly against the S&P 500 last year. For most truly diversified portfolios you would realize a return less than 5% for the year. History continues to prove that diversification rules the day and is the prudent strategy for most clients with long-term investments. However, 2014 was a year in which the S&P accounted for the highest performance for clients. The truth is that investing solely in the S&P with no other index exposure would bring about too much risk for the average investor.
Media continues to point to the S&P 500 as the benchmark for comparing your returns. The reality is that this is misleading for most client portfolios. The S&P represents mostly large cap stocks, not a diversified portfolio. A more diversified portfolio may have exposure to international equities, fixed income and alternatives that are not well represented in the S&P benchmark. Investors tend to fixate on the S&P 500 because it’s the most well-known index. It’s the advisors job to continue to point the client back to their customized portfolio and set the appropriate benchmarks for comparison. The onus is on advisors to turn 2014 into teachable moments for their clients.
So you may be asking, what does this mean for my portfolio? We still maintain that diversification remains the prudent way for long-term investors to stay disciplined. There are countless examples from history that show that diversification across various asset classes (not just the S&P 500) provides a less volatile ride as the markets continue to move. What we’ve recently learned is how unique 2014 truly was with large cap stocks gaining significantly, while other asset classes were uneventful. The key to appropriate analysis is finding a more realistic benchmark comparison for your customized portfolio.