It's Opposite Year
Benchmarking your whiplashed 2024 portfolio.
Nothing serves up more humble pie than the open markets. Truth must come out. It doesn’t care who the bulls and bears are, who made what assurances and to whom, whose career is at stake or who is up for reelection. The market just moves, and I think that is a beautiful thing.
Financial markets are pools of collective influences, all reacting to one another, exchanging information in real time. Some influences are greater than others, true, and this can lead one to believe that manipulation occurs. It does occur, but it cannot be sustained. Eventually, price is crowned prince and the liquidity king eliminates the usurper.
Near the end of 2022, most financial analysists were calling for a recession in 2023. There are still a few holdouts pushing their recession calls into 2024. They have good reasons, so this is no attempt to ridicule.
In fact, I was in agreement up until recently. The yield curve was deeply inverted, inflation uncomfortably high, and consumer indebtedness accelerating. The negative data coordinates seemed to be leading one direction.
But these isolated data sets do not paint the full picture composing gross national spending, otherwise known as GDP. The technical definition of a recession is two consecutive quarters (6 months) of declining GDP.
In Q3 of this year, GDP grew at a 4.3% annualized rate, which puts the US on track for a projected annual GDP growth rate of 2.4%. Not a banger year, but hardly a recession. Despite higher rates and prices, the consumer is still largely in play.
Recessions are notoriously difficult to predict. Even the smartest economists using the most complete data sets mankind has ever created cannot predict more than a quarter into the future without losing fidelity.
This is exactly why investors who de-risked their portfolios late last year are looking on in bewildered frustration, mistakenly investing in their false hopes of a massive equity correction when they should just simply invest in the market and leave well enough alone.
Benign negligence is the successful investor’s secret weapon.
Energy companies, value equites, international stocks, these positions all outperformed last year. Not so much in 2023. In fact, its almost as if Dolos himself took the reigns of financial markets and let loose a god level crack of leather that reverberates in the psyche of every analyst trying to make sense of things.
The NASDAQ, down by more -33% in 2022, is up more than 51% year to date! Energy stocks, the +55% darling of 2022, down -4.01% in 2023. While these are two of the more extreme examples of performance whiplash, the trend holds true across most asset classes. International and value stocks underperform while growth equities shine. It’s opposite year.
Some trends remained the same. Large cap equities outperformed mid to small capitalization equities. Emerging markets lag. Until recently bonds were struggling in the face of increasing interest rates. In fact, if not for the recent rally fueled by a massive drop in long-term rates, US aggregate bonds were on track for their 3rd consecutive year of negative returns.
Investors looking to concentrate their nest egg in the best performing investment can easily become frustrated. Things always seem so clear in hindsight. But that is only because the universe of infinite probabilities has collapsed down to one definite outcome.
“So simple” we think, but we forget that we put needles in pin cushions, not haystacks for a reason. Though the future is uncertain, we constantly discount the importance of diversification.
If your portfolio has outperformed the NASDAQ or even the S&P 500 year to date, this is both good but also informative. It means that you are leveraging concentration risk.
While this worked out so far this year, the universe can be a cruel distributor of fortune. Concentrating in one index or asset can work in your favor, but the greater variability of outcome creates less certainty.
My experience suggests that this strategy does not align well with human behavior. We are wired from birth to reject things that do not make us feel good, even if only temporarily. One time I used the wrong soap on my 3-year-old daughter and now my wife and I deal with the “not my eyes!” cry every night we tell her it’s bath time.
Imagine if every elevator operated with a 10% probably that you would be vaporized, a 30% probability you would be instantly teleported into your ideal life, and a 60% probability it would function as normal. Would you take it?
Diversification means you will always hate a portion of your portfolio. It’s so blasé. The media tend to report on the outperformers, because they are noteworthy, but this leaves us with a sense of FOMO (fear of missing out). We think, “should I just put it all into that?”. Not if you desire the narrowest set of possible outcomes.
Here are the benchmarks, year to date, for diversified portfolios. Sometime, a picture is worth more than words. So long as the future remains unpredictable, diversification is a sound wealth building strategy.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to effect some of the strategies. Investing involves risks including possible loss of principal.
Securities offered through LPL Financial LLC. Member FINRA/SIPC. Advisory Services offered by National Wealth Management Group LLC, an SEC Registered Investment Advisory and separate entity from LPL Financial LLC.