Last Year’s Stock Market Winner

The large publicly owned U.S. companies earned 1st place among the asset classes with excellent returns for 2014, as indicated by the S&P 500 index.  The S&P index tracks the largest U.S. companies traded on the New York Stock Exchange. The index rose 11.39% for the year, and the total return with reinvested dividends was 13.69%.

Other segments of the U.S. market did not fare as well. In particular, the small U.S. publicly traded companies trailed their large counterparts. The Russell 2000 Index which measures the performance of the small company segment of the U.S. equity universe had a total return of only 4.89% in 2014.  In addition, the international developed markets which are companies that are based in continental Europe and in the Asian-Pacific market also trailed their U.S. counterparts. The index that track these markets the MSCI World ex USA Index (gross dividends) rose 6.8% in local currency but lost 3.88% in US dollar terms.

So what shouldfirst place investors do now with their investments? In order to answer that question, it always comes back to clarifying what the investor is trying to achieve. By determining this, it focuses investors on answering the question of why they own publicly traded companies, known as stocks, in the first place.

The only legitimate answer to owning stocks is to participate in the historical growth that has occurred through owning them for the long term. If that is the case, then the changes to be made would be to reallocate money FROM last year’s winner by selling some large U.S. company exposure and in fact, depending on one’s portfolio, may actually require buying both the small U.S. companies and international companies asset classes.  The key will be to have set target allocations for each allocation.

It is common for individuals to hear the year-end commentary and the various so-called investment gurus opining about their forecast for the coming year. It would be wise to tune out this noise.

As you can see from the asset class index performance chart from 1999 to 2013 below, the various asset classes such as large U.S. companies (in blue), or emerging market companies (in yellow) have a randomness to their yearly performance returns. Each color represents one of the 10 asset classes including bonds and real estate. It can be easy to be distracted by short-term results and try to listen to people who want to paint this coming year’s skittles chart. Don’t be tempted.

Asset Class Index Performance 1999-2013Continue to own a diversified portfolio which captures all of the various asset classes. By having targeted percentages of the various asset classes, with that percentage having been determined with a plan based on your values and goals, will allow you to re-balance back to target allocations. This simple, but not easy, procedure allows you to accomplish the real secret to successful investing:

Selling high and buying low.

This re-balance is accomplished by selling a portion of the asset class that has increased above the target percentage (as may be likely for large U.S. stocks) and adding the additional money to an asset class or classes that is below their target allocations. Having a portfolio with set target allocations allows you to take the emotion out of the equation. Work with an independent financial advisor to help you determine the best way to capture these asset class exposures and maintain the target allocations year to year in order to accomplish your values.

Having a consistent investment philosophy allows you to have the discipline and patience that is required to maintain your focus, especially on various asset classes that under-perform from time to time, as they will.  If you need assistance in having this discipline, hire a financial coach to help you.

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About Dan Crimmins

Dan Crimmins, co-founder of Crimmins Wealth Management, is a financial coach and fee only financial planner. Have a financial question? ASK DAN

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