- Now that we have wrapped up the third quarter of a hectic 2020, clients will be receiving their quarterly statements, and for many, they will be pleased to see that many markets around the world were positive in Q3. However, some may still wonder why their portfolio is not doing as well as what they are seeing in the media.
- Investors today have access to financial news via the internet and social media, among many other mediums, and can access real time stock prices, analysis, and forecasts all from their smartphone. Having this ease of access is fantastic in many ways, but it can also give investors an inaccurate picture of what is actually occurring in their portfolio.
- Let's take for example, the Dow Jones. The Dow is one of the most commonly followed indices that was first calculated in 1896 and is a price-weighted index comprised of 30 stocks. As shown in Exhibit 1, the stocks that make up the Dow account for only 15% of the total global market value, yet many investors use this index as a baseline. The methodology constraints associated with the price-weighted Dow result in it not holding 4 of the top 5 largest stocks in the world – Microsoft, Amazon, Alphabet (Google), and Facebook. Nonetheless, if you open the Stocks app in your new iPhone, the Dow Jones Industrial Average will be the first thing you see.
- Wall Street and the financial media will also often cite the S&P 500 when depicting how the stock market has performed, another common market index that measures the performance of 500 US stocks. While it is widely agreed upon that the S&P 500 is an adequate representation of the US large cap market, it still represents less than half of the total global market value, as illustrated in Exhibit 1.
- For investors, it’s important to understand that when someone refers to “the market”, this can be vastly different than their portfolio. For one, many individuals have an asset allocation that includes a mix of stocks and bonds, however, the media often reports on the performance of stock indices when describing the performance of the market. Additionally, investors in pursuit of higher returns may have exposure to different asset classes, such as small cap and value stocks. While the Dow Jones and S&P may represent how the large cap markets are performing, investors may want to diversify outside of large cap stocks to increase the possibility of outperformance. It is difficult to know which country will outperform from year to year, leading many clients to hold a globally diversified portfolio. By expanding the investment opportunity set beyond their domestic stock market, investors may improve the reliability of outcomes. However, given many of us are based in the US, we often are reminded how the US markets are doing rather than global markets.
- In many cases, what the financial media is reporting is not the best barometer of what is happening in the overall market nor investors’ portfolios. Rather than unconsciously anchoring investment performance to what is being shown in the media, investors should take solace in knowing that their financial advisor has developed an asset allocation that is suitable based on their unique needs and preferences.
- As Weston Wellington, a Vice President with Dimensional says, read the newspaper to be an informed citizen, not for advice on how to navigate the financial markets.
S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Top 5 stocks for each source measured by market capitalization.
1. Dimensional US and Global stocks represent the list of tradeable stocks as of August 31 within Dimensional portfolio management systems. Weights given are market capitalization based weights, with securities capped at 5% maximum.
2. Source: https://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average
3. NASDAQ is the set of securities listed on the NASDAQ stock exchange as of the given date, at market capitalization weights. Eligible securities include common stocks, tracking stocks, and ADRs.