Why doesn't my portfolio match the S&P, DOW or NASDAQ—What Gives?

Why doesn't my portfolio match the S&P, DOW, or NASDAQ—What Gives? 

When evaluating whether or not your portfolio matches the performance of, for example, one of these indexes, it's essential to understand that most portfolios are not designed to match the performance of an index. 

Most portfolios are designed to be diversified. A diversified portfolio is a collection of investments that are different from one another. When one goes up, others in the portfolio will go down. 

The good news about a diversified portfolio is that you are more protected against losses. The bad news is that the portfolio tends to gain less when markets rise. But is that terrible news? I would say no! This happens because of the constant ebbs and flows of the market—such as economic conditions, political events, investor sentiment, and the like.

Think of it this way, when traveling, the goal is to get from point A to point B safely so you can enjoy your time away on vacation. The purpose of investing should be the same—to invest your money in your pre-retirement years so you can get to your retirement years with a nest egg to live off and enjoy the rest of your life. This is done through a diversified portfolio. Knowing this is key to a successful investment experience. 

If your portfolio matches an index's performance, it's because your money is inside an investment that invests in the same stocks, with the same allocation to each stock as the index. This should be concerning because it's a tell-tell sign that you are not diversified across asset classes.  

For example, the S&P 500 index tracks the performance of 500 large-cap U.S. stocks; If your portfolio matches the index's return for the year, you have no exposure to value stocks, mid-cap, or small-cap stocks or any other asset class the S&P 500 does not track. 

Be fair, and don’t beat yourself up over your portfolio’s performance if you have a diversified portfolio. It means you are invested across asset classes. Remember, that's a good thing. It's also equally important, if not more important, to be concerned if your portfolio matches the performance of one of the top three indices always reported on in the news. 

If you need help with your financial planning and investments, please reach out; we'd be happy to have a conversation. 

Until next time, Happy Planning

Cort