Are You Earning 20 Percent?
The stock market is soaring this year with index returns topping 20 percent. The NASDAQ, S&P 500, and Dow Jones have risen 27.3%, 23%, and 18.4%, respectively. It’s a good year to own stocks despite Brexit, The Trade War, and the Boeing disasters.
Are you earning 20 percent? If so, congratulations. A 20% return is twice the long-term historical average of 10% for the stock market.
NASDAQ, Dow Jones, & S&P 500:
If your assets are diversified, you’re probably earning less than 20 percent. Most likely, you also own small-cap and international companies along with a few bonds. Your exposure to large-cap stocks might be less than 25% of your total portfolio. The more stock exposure you have, the higher your returns are for this year.
Various Asset Classes:
How have the other asset categories performed this year? Small-cap stocks are up 17.3%, international stocks are up 16%, emerging market stocks are up 12.6%, long-term bonds are up 11.6%, and short-term bonds are up 1.2%. A balanced portfolio of these asset classes has risen 17.3% this year.
Balanced Portfolio: 60% stocks, 40% bonds:
Investing all your assets in the S&P 500 this year would have been a wise decision if you knew in advance the market would rise substantially. Remember, the market was down 16% last December, and few people dared to buy the dip. Last year the S&P 500 lost 6.24%, and during the Great Recession from 2007 to 2009, it fell 56%. During the Tech Wreck from 2000 to 2003, the index dropped 49%.
The Great Recession:
The Tech Wreck:
The 1970s was also a tough time for stocks. From 1973 to 1979, the S&P 500 lost 8.6%.
Should you invest all your assets in the stock market? If you have a high tolerance for risk and you can handle the volatility, then go for it — however, a more prudent recommendation is to invest in a low-cost globally diversified portfolio of mutual funds.
How do you know if you can handle the heat of a single index? Here are a few suggestions.
- Participate in a risk profile questionnaire or survey. If you’re curious, here’s a link to the Risk Number profile from RiskAlyze - https://pro.riskalyze.com/models/581983259.
- Complete a financial plan. Your plan will help you quantify your goals and tolerance for risk. Here’s a link to Money Guide Pro’s Financial Planning Portal, if you want to start the planning process - https://www.moneyguidepro.com/tdameritrade/Guests.aspx?gst=772C733D7E22A31E89ED410B89F5666745D8A996847880536863C550B5129C86
- Review your current investment holdings to determine your asset allocation.
Investing requires patience and prudence. Do not chase returns or get lured into risky investment strategies, because if it looks too good to be true, it probably is. Instead, focus on your goals, invest often, keep your fees low, and think long term.
The simple believes everything, but the prudent gives thought to his steps. ~ Proverbs 14:15
November 11, 2019
Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.