Add Low, Trim High

December 22, 2020

As we get ready to close the books on 2020, a year most around the world will remember forever as a year of devastation and disruption, could end up being one of the most pivotal years for capital markets.  You may be surprised to read that (at the time of writing) the S&P 500 was up for the year over 16%.

S&P 500 Total Return Level Change

This highlights the lack of understanding from many retail investors of how they should measure their portfolios. If you’re just positive this year, it isn’t a cause for celebration, it’s time to audit your investments and determine what went wrong. Undoubtedly it was a volatile year, but as you can see, it does not have to equate to a loss in your portfolio. Volatility creates opportunity, and for those disciplined investors it paves the way for long term outperformance. Outperformance of an index, not of an emotional scoreboard.

I blame the entire financial planning industry for a big portion of this misconception. Investors have been inundated with marketing materials and advertisements that defer attention from how the investor performed against their respective index, to Monte Carlo simulations that attempt to predict a level of success over a 20 year+ time period. Why would they do this? Well, it’s really hard to consistently make or beat your index, and most don’t want to have the conversation. But we know better!!!

Ok enough ranting, let’s get back to the “pivotal” part of the earlier conversation. For some time, I’ve been highlighting the potential move from what’s worked, to what hasn’t. The results are really starting to show themselves. A quick look at the last 3 months between the large cap and small cap index (S&P 500 & Russell 2000) shows some major differentials. 

S&P 500 Russell 2000 Level Change Comparison

As the market now looks towards those companies that could ultimately benefit from MASSIVE stimulus and low rates, your attention has to be drawn towards small caps, and that has been playing out over the past two months. If you’ve missed it, don’t fear, you still have time.

S&P 500 Russell 2000 Level Change Comparison Long Term

A look at a longer-term chart shows still a way to go to get back to level. 

A look deeper into growth vs. value would give you a similar looking chart. It has been an easy time for portfolio managers in the past few years driven by the biggest of the big companies with strong balance sheets as the overall market feared we would see bankruptcies and only the strong would survive.  Queue the Fed!!!! 

In a few discussions last week, I’ve had a few questions relating to how far above my fair value model the market is today. Yes, I acknowledge that it’s at a level that is historically high, but that does not necessarily mean that we are in for a swift pullback. What it does signal is a need to look deeper at some of the components of portfolios. If the overall market looks expensive, it means that there are components in that index that are really, really expensive and some still show a reasonable valuation.  My Buy/Sell Sheet does not relate to an all-in or all-out decision. It has never been about buy low/sell high. It’s add low, trim high. 

With all that said, I want to thank you for your continued trust in us, in what was a year that had us all questioning a lot of things. I/we do not take that the trust you have put in us lightly. I promise to continue to learn and improve our overall services to you in 2021 and beyond. From my family to yours, Happy Holidays & have a very Merry Christmas!!!

S&P 500 Buy Sell

Mick Graham, CPM®, AIF®

Branch Manager/Financial Advisor at Raymond James in Melbourne, FL

Opinions expressed are not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Some investments mentioned may not be suitable for all investors. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.

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