It’s that time of the year when we sit down and evaluate the performance of our investment accounts. “Stocks are up double digits this year. So is my account right?”
No, Not quite. The S&P 500 is up double digits this year, but just about every other broad stock market index has under performed it. We see the news headlines every day how the Dow Jones and S&P 500 are making all time highs. What we don’t see reported as much is that they represent only a slice (U.S. Large Companies) of the entire stock market and missing are the performances of Small Cap, Mid Cap, International, and Emerging Market stocks.
Here are the year to date returns as of December 11 of the broad stock categories. Pretty big disparity huh?
So if you are diversified in your stock holdings (which you should be) then you will have under performed the S&P 500 for the year.
Jason Zweig of the Wall Street Journal wrote an excellent article on November 28th about this very scenario. You can read by clicking HERE. Below are some of the main points.
So far this year, the Russell 2000 index of small stocks is up 3.1%, including dividends, while the S&P 500 is up 13.9%—the widest gap in favor of large stocks since 1998. Fund managers who bought anything but the very largest stocks in search of value have thus been “hurt big time,” says Stuart Kaye, co-founder of Matarin Capital Management in Stamford, Conn.
The average U.S. stock fund has 5% of its assets in non-U.S. stocks, according to Chicago-based investment researcher Morningstar. Markets in the rest of the world have trailed the U.S. by 14 percentage points so far this year.
Another factor: the one-year average of a technical measure called “dispersion”—which tracks the difference between the returns of winning and losing stocks—is at its lowest levels in modern history, says Mr. Mezrich…….But low dispersion is driven largely by the market’s lack of sharp swings this year—which, in turn, appears to be fueled by low interest rates. “The prospect of a rise in rates next year,” says Ms. Holcomb, “should eventually increase volatility and widen the difference again between winners and losers.”
Meanwhile, index-fund investors shouldn’t get cocky about the margin by which they have beaten investors in actively managed funds, says John C. Bogle, founder of the Vanguard Group and father of the index-fund industry. “I’m concerned that people will say that indexing will always win or always win this big,” he says. “This level of outperformance just doesn’t happen for long.”
Wow! Even John Bogle, the king of index fund investing, says that this phenomenon is short lived. And the last time there was this much disparity between large and small companies was 1998? Hmm…. I recall that shortly after Large Cap Domestic stocks took quite a beating. Hindsight is 20-20 and owning only Large Cap Domestic stocks this year would have been successful. However we typically invest for longer periods than just one year which is why we continue stay diversified. So when you are evaluating your 2014 returns on your stock investments, please keep this diversified view in perspective.