Underperforming Assets: Have you Tuned in to Diversity?

Recently, a client came to me wanting to talk about his portfolio. He had concerns that some of his assets were underperforming. This surprised him because he thought the market had been performing well this year — and he assumed his investments would follow suit.

Many people look to the Dow Jones Industrial Average as a gauge for the economy and for their portfolio. In the case of this client, he noted the double-digit return in the market and asked why he wasn’t seeing similar returns in his portfolio.

In the portfolios we manage, about 13 percent of the assets are tied to companies on the Dow Jones. The Dow is made up of the top 30 companies in the market. This begs the question: If the Dow is only 30 companies, why do news organizations insist on reporting on how well the Dow is doing on a daily basis?

The answer is it makes for good drama. The Dow may drop 2 percent, but the report will say a “500-point plunge.” It sounds like major economic news. A few decades ago, a 500-point plunge would have been catastrophic, but today, it doesn’t mean nearly as much. It’s not even a blip on the radar.

Now, these 30 companies do represent the largest workforces in the country. How well these companies perform, good or bad, can give us some insight into how the economy is doing, but they’re not the best gauges for portfolio performance.

In 2017, the No. 1 market return was from small-cap, not Dow, companies. Small-cap companies outperformed the Dow 2-to-1. But if you have all of your money in small-, medium-, or large-cap companies, you’ll only end up hurting yourself — and you won’t be happy with your portfolio.

This is why we talk so much about maintaining a diverse portfolio. The things our fathers, grandfathers, or even great-grandfathers were investing in might not make any sense today. They may have seen excellent returns in the past, but that may not hold true as we look at the current financial landscape. At one point in time, they may have been getting 12 percent returns on simple savings accounts, but that doesn’t happen today.

At Mattson Financial Services, we utilize WealthGuard — a tool that helps ensure proper asset allocation when it comes to long-term investments. It protects your retirement funds and helps keep you nimble.

That is to say, when the Dow is posting double-digit returns, you might not see that reflected in your portfolio. But you’re certainly not going to see major losses when the market takes a turn in the other direction.

Realistically, you’re more likely to see 8–10 percent returns. As you prepare for retirement with a diversified portfolio, you’ll be set up with the income you need to enjoy that retirement. So, when it comes down to it, tune out the news and tune in to diversity!

–Gary Mattson