A common complaint from investors is that their portfolio isn’t following the overall market. They feel that when the market goes up, their account value hardly budges, but when it goes down, it seems to lose the little bit that it gained plus some. They’re frustrated and can’t seem to put a finger on the causes. So, here are three reasons why, when the market’s up, your account may not be following suit.
To start, one reason you may be underperforming is because of your overall asset allocation. A quick comparison between “growth” and “value” based investments shows a major discrepancy, especially when you evaluate market capitalization.
For example, so far this year Small Cap Value is up over 4% while Small Cap Growth is at the other end of the spectrum, down 4%. Mid Cap Value is boasting a hefty 5% return YTD but its Mid Cap Growth cousin is off more than 1% over the same period. It’s the same story with Large Cap Value which has provided a flashy 4% gain compared to -1% for the Growth folks. As a result, if your portfolio is tilted toward growth in one or more of these areas, you can see where the problem may be.
A second area that may be contributing to your lackluster returns is in your sector weightings. If you are using an index fund or ETF that uses the S&P 500 as a benchmark, a quick analysis of sector returns highlights some areas of concerns. Basically, the S&P 500 has 10 sectors, but each one is not given the same weight in the portfolio.
Financials make up 16% of the index while Healthcare another 14%. Between the two of them they cover 30% of the index and are both down nearly 6% for the year thus far. On the other end, Utilities and Communications services each make up less than 3% of the index (6% together) but they are up 17% and 7% respectively.
Actively managed funds and ETFs have the flexibility to make adjustments to these percentages, therefore, may be costing you some return if they are overweighted towards underperforming sectors.
One final but less noticeable factor may be how dividends are dealt with. Generally speaking, if dividends are received as cash they will go into a money market fund where they just basically sit until re-allocated. Whereas, dividends that are re-invested into additional shares tend to be less stable since they are impacted by market or stock fluctuations.
While cash dividends may not pay much in interest, they can be very welcoming during a volatile market and when measuring quarterly performance.
Investors with a down portfolio in an up market may be wondering how to turn things around. First of all, it’s important to understand that sectors, market cap, and investment styles come in and out of favor. What’s hot now may not be in a week, month, or year. That makes it important to check your asset allocation on a regular basis.
Many people still have the same mix of funds from 10 or even 20 years ago. Therefore, they may be taking on more Growth or Small Cap risk than they would like. However, those with a longer time horizon may not need to do a thing and just wait for historical averages to work in their favor.
Additionally, there are a host of investments to consider when it comes to managing sector weightings. There are equal weighted funds and ETFs which can even out the allocation between each of the S&P 500 main classifications. Investors can also also balance out their holdings using individual sector funds. Adding a Utilities or Telecom fund, for example, can add some balance to your portfolio’s direction.
Overall, it can be easy for investors to feel frustrated by little or no progress in their portfolio, particularly when the market is on a hot streak. That makes it important for investors to look under the hood and be aware of their penchant for “Growth” or “Value”, market capitalizations, sector weightings, and dividend policies.
