Depending on when you’re reading this, we’re either closing out or beyond the first quarter of 2021. I think I can speak for most of us when I say that I am excited that 2020 is over and we are safely into year 2021. There is so much going on in the world and stock market, which leaves us with much to discuss.
We have been thinking about several frequent questions we’ve had in the new year. As markets and indices continue to plow through record highs, investors are asking:
- “Should I invest at market highs?”
- “Is my portfolio ready for what’s coming?”
- “Are my investments truly diversified?”
These are timely and important questions since the beginning of the year is a great time to think about these questions.
Question 1 – When to invest?
One consistent theme we have observed over the past few months is a return to markets breaking previous records. The Dow first crossed above 20,000 in January 2017. It crossed 30,000 in November 2020. Meanwhile, it took 18 years to grow from 10,000 to 20,000 (1999-2017). The question becomes, “Should I invest at market highs?” This is a frequent question among investors, and one that has kept investors with cash on the sidelines for years. What you should think about thoroughly is what is your time horizon. Here’s why.
History tells and shows us that investing generates positive returns (strong returns, at that) for long-term investors, including investing at market highs. Whether Dollar Cost Averaging or Lump Sum investing, the simple fact is that markets go up more than they go down. Since 1990, 66% of the monthly S&P 500 returns have been positive.
Question 2 – Readiness of portfolio?
The second question, “Is my portfolio ready for what’s coming?” is a bit vague, and can be hard to answer in general given no two portfolios are the same. What I will say is that while 2020 saw plenty of upheaval in markets (and other parts of modern life), 2021 provides a beacon of hope for our economy. To properly and individually answer this question, start by analyzing and evaluating your portfolio(s). It is highly likely many portfolios have drifted or moved off of the original allocation. Portfolio rebalancing is a great tool for keeping your portfolio efficient and in line with your risk tolerance.
Additionally, being aware of what we call home-country bias is one way to identify opportunities in your portfolio. This bias has continued to build strength over the last 10 years as indices tracking US equities have performed better than international equities. Keep in mind that past results are not indications of future returns. It is interesting, however, that 75% of the top individual stocks since 2011 have been based outside the United States. Be open to diversifying your portfolio to include some international exposure.
Question 3 – Investment diversification?
Speaking of diversification, a question we have gotten plenty of over the past year and into 2021 is, “Are my investments truly diversified?” It’s a great question and the answer may surprise you.
We hear the word diversification all the time in the investing universe because it’s one of the primary foundations for investors throughout the world. Many investors pick index funds as a way to access the stock market. Index funds are often thought to provide broad market exposure and diversification by investors. The S&P 500 index is perhaps the most recognizable stock market index, and it deploys a market-cap weighted strategy to determine the composition of its holdings. In other words, the larger companies with greater market cap take up a majority of the index. A real-world example of this is Tesla, which was added to the S&P 500 in December 2020. After Tesla’s addition to the S&P 500 Index composition, the top six holdings equated to the bottom 369 stocks in the index in volume.
While investing in the S&P 500 Index does provide exposure to all companies included in the S&P, it does not provide equal exposure across those companies as a result of the weighting strategy the index uses. Thus, an index fund may not provide the same level of diversification that an investor assumes he or she is receiving at the time they invest.
As we continue to progress throughout 2021, it is important to continue to monitor your investments, meeting and speaking with your investment advisor or plan representative, and invest in your future.
As I always say, never hesitate to reach out to your advisor with any questions you may have. We work for you. All the best for a prosperous 2021.
Article Written By David Wentz
David Wentz is CEO of Tax Favored Benefits, Overland Park, Kansas. Wentz is a graduate of the University of Kansas School of Law with a Juris Doctor degree. Wentz frequently speaks at various professional and business seminars about pensions, profit sharing, 401(k) plans, tax favored benefits, and investment programs. Western Equipment Dealers Association endorses Tax Favored Benefits as a 401(k) provider. No compensation is received. More information is available at www.taxfavoredbenefits.com.