You may be feeling some envy toward the numbers the major indices put up for 2013. It never fails. We have a great year in the equity markets, and advisors everywhere are having the performance envy conversation.
What is the performance envy conversation you ask?
It’s the conversation where an advisor is reporting performance numbers for the previous year. Usually good, solid performance numbers. However, the portfolio return numbers are less than what the Dow, S&P and NASDAQ returned. Inevitably investors will compare their portfolio to these indices. Right or wrong.
To be specific, here are the indices returns for 2013 according to Morningstar:
- +25.57% Dow Jones Industrial Average
- +34.73% NASDAQ
- +28.81% S&P 500
So now that you’ve oogled the 2013 indices returns, you’ve probably done the mental comparison to your own portfolio already. It’s about right now when you start to say…”Hey I didn’t do that well.” So I would like to give you a few reasons that you did not match or exceed what the indices returned. Here goes:
1. You own a different portfolio than an index. That’s right. You probably have other investments besides U.S. Large and Medium cap stocks. Your portfolio could contain things that are not present in equity indices, such as bonds, international investments and alternatives. Plus you don’t just own the index, which then would be a fair performance comparison. The Dow for example consists of just 30 large U.S. stocks.
2. Your portfolio has expenses. An index is just a collection of many different securities. It is not “managed” or traded. Therefore, it has no costs associated with it. As an investor, your
portfolio may have internal costs or management fees. In addition, there may be trading costs for making changes to the portfolio. Why am I bringing this up? It does effect performance.
Portfolio performance is reduced by the cost of running the portfolio.
3. Your portfolio may be less risky. If you have a diversified portfolio you probably took on less risk. Even if that portfolio was on the aggressive side. How can that be you ask? The indices
consist of medium to large stocks. So that’s one to two asset classes. In a diversified portfolio you may have a dozen or more asset classes. That will reduce the portfolio’s volatility. Other asset
classes in a diversified portfolio can often lower performance. However, these same asset classes could save your butt during a decline. These indices could dive bomb during a market
correction more than your diversified portfolio. It’s easy to have guts in a bull market.
It’s easy to develop a case of performance envy after a phenomenal year like 2013. As an investor, remain focused on your goals. Are you getting portfolio returns that will satisfy your long-term financial planning goals? If you are, then don’t worry about missing this extra return..and extra risk. On the flip side, don’t tolerate underperformance of a portfolio either. If you liked my article, why not subscribe for free right here!
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896. The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies. The return and principal value of the investments will fluctuate so that, when redeemed, they may be worth more or less than their original cost. Past performance is not a guarantee or a predictor of future results of either the indices or any particular investment.