Under-performing the S&P 500? You May be Ok

It isn’t always a bad thing to under-perform the S&P 500 index. If you are using it as your investment yardstick, be sure you understand what you are measuring.

Most families have probably been under-performed the S&P 500 index for roughly the last 3 years. If you have, this may lead you to second guess your investment portfolio. Perhaps you are thinking of moving some investments around. Your international investments probably aren’t looking too hot right now.

Asking questions about your investment portfolio is a good thing. Most families don’t ask enough questions. But just underperforming the S&P 500 — in and of itself — does not necessarily mean your investment portfolio is poorly constructed.

The S&P 500 is just one asset class of many

For roughly the past 3 years, US large company stocks have been one of the best performing asset classes. The S&P 500 happens to be an index that is essentially made of US large cap stocks. If you are properly diversified, meaning you own some foreign stocks, some small company stocks, and maybe some other asset classes, then your portfolio will probably have under-performed the S&P 500 since 2010.

Sometimes it is like that, sometimes it isn’t

On the flip side of this, US large company stocks were one of the worst performing asset classes from 2000 – 2009. Having diversification into other asset classes would have helped the total portfolio greatly during this time period. The way to give yourself the best chance of getting good returns decade after decade? Own all the asset classes.

We never know when a trend will reverse, but history has shown that periods of over and under-performance of one asset class over another can sometimes last for 10 or even 20 years.

So just stay diversified for the long term. Three years can seem like a long time while you are living it. It can feel like it might be time to make some major portfolio shifts….maybe let go of some under-performing international funds. Don’t be tempted by this feeling.

 Photo by Scott Akerman 

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