Positive and Negative (8/12/2020)

I am constantly bringing up the use of Modern Portfolio Theory which advocates the use of diversification in an investment portfolio. We attempt to keep the portfolios of our clients “dynamic” by making changes to the allocation of assets in each portfolio when we believe it is in the best interest of our clients.  

When the stock markets plunged in March the use of diversification did not mean our portfolios didn’t go down. They did go down, but not as much as the U.S. or international equity markets. As the recovery has taken place, we have seen the portfolios moving back up. Some are now in a positive position for the year, while others are still down by a bit.  

I often use the S&P 500 as our guide to the U.S. equity market. The results thus far this year were reported in the Wall Street Journal, under Major U.S. Stock Market Indexes. This indicated that the S&P 500 is up 4% year to date. I was happy to see this since it was down over 30% on March 23rd. The S&P 500 is not the entire story. The S&P 500 is heavily weighted toward large stocks, and in particular tech stocks, both of which have out preformed the broad market. To put this in perspective: mid-sized stocks, using the S&P Mid-Cap 400, are still down 5.6%, small stocks using, the S&P 600, are down 9.9% and global stocks without U.S. stocks, using the DJ Global ex U.S., are down 6.4% year to date. As you can see most indexes are still negative. The Dow Jones Industrial Average (DJIA) which is comprised of large stocks is down 2.6% year to date.

This period has been a good test of the significance of using diversification to lower risk, based on an individual's risk strategy, and re-balancing to maintain portfolio integrity. We are still in a period of high volitility and the current results are not an indication of what the year-end results may look like.

Ed Mallon

Posted August 12, 2020