When stocks surge and bonds lag, as they are now, convincing investors of the importance of portfolio diversification can be challenging. With the S&P 500 up nearly 12% year-to-date in mid-May and the Dow Jones Industrial Average hitting 40,000, investors may develop “S&P 500 Envy” if their returns don’t match these impressive figures.
This sentiment wasn’t prevalent when both stocks and bonds were down in recent years, but a similar situation occurred in 2018, feeding into the “S&P 500 Envy” concept. BlackRock even created a presentation to help financial advisers address this issue with their clients. The presentation highlighted that although a diversified portfolio might underperform the S&P 500 in the short term, it often yields better long-term results.
A key graphic from this presentation showed that during years like 2000-2002, 2008, 2020, and 2022, when the S&P was down, a diversified portfolio also declined but by a smaller margin, leading to investor dissatisfaction. Conversely, from 2009 to 2019 and in 2023, when the S&P surged, a diversified portfolio grew more modestly, causing envy.
Over the long run, however, the diversified portfolio outperformed the S&P, proving that “diversification can work, even when it feels like it’s losing.”
Nicholas Olesen, a certified financial planner with Kathmere Capital Management, echoes this sentiment. He advises that diversification hedges against economic fluctuations and addresses recency bias, the tendency to believe that recent trends will continue indefinitely.
Olesen emphasizes the importance of a balanced approach, tailored to individual investor needs, and sticking to this plan despite market turbulence.
Ross Haycock, a certified financial planner with Summit Wealth Group, also stresses the timeless wisdom of diversification: “Don’t put all your eggs in one basket.” He notes that diversification discussions are easier with long-term clients who have experienced market cycles, whereas newer clients may require more reassurance during turbulent times.
One common mistake investors make when shunning diversification is focusing solely on bond prices rather than yields. Despite bonds underperforming in recent years, they still generate consistent, guaranteed yields, especially when held to maturity. O
lesen warns against “statement shock,” where investors see a small daily return and compare it unfavorably to the S&P’s gains, without considering the overall yield and long-term value.
Advisers urge investors to follow a well-considered plan and avoid making hasty decisions based on short-term market movements. By doing so, they can avoid the pitfalls of FOMO and ensure their portfolios are well-positioned for long-term success.
