Question: I pulled out my investment stuff for last year and compared to the stock market, I didn’t do very well. My brother-in-law told me the stock market was up 15% last year, but my stuff didn’t do nearly that well. What’s up with that? Should I change something?
Answer: Well, there’s stuff, and then there’s stuff.
In the 1987 movie The Princess Bride, The Sicilian criminal mastermind Vizzinni keeps lisping the word, “Inconceivable!” Finally, someone suggests, “You keep using that word. I do not think it means what you think it means.”
That’s how I often feel when people use the term “the stock market.” Exactly which stock market did you have in mind?
When I think of the stock market, I think of apples. Not the iPhone company, the fruit. If they ever determine that coffee or apples are bad for you, I’m not long for this world. But when I go to the store for apples, I’m met by a bewildering set of choices: Rome, Red Delicious, Pink Lady, Jonagold, Gala, Fuji and even Jazz.
Whatever happened to just…apples?
Likewise, when someone uses the term “the stock market,” they could be referring to one of the places where stocks are actually traded. The two biggies in the United States are the New York Stock Exchange, founded in 1792, or the new kid on the block, the NASDAQ, founded in 1971.
But more than likely, they are talking about one of the many indexes used to measure how a portion of the stock market is performing. And here’s where you get into apple varieties: when it comes to performance measuring indices, you can choose from the S&P 500, the Dow Jones Industrial Average, the NASDAQ Index, the Russell 2000 or the Morgan Stanley Europe, Australia and Far East Index, to name just a few.
So your brother-in-law told you the stock market was up 15% last year? Hmmm. Is this the same brother-in-law that tells you about the big bass that got away?
Setting aside the possibility of exaggeration, it sounds most likely that he’s talking about the performance of the Standard and Poor’s 500 Index in 2014. The S&P 500 is a stock market index made up of 500 large US publically traded companies. And last year, the S&P 500 index gained about 14%. Not bad.
But other areas of the stock market didn’t fare so well. If you were invested in smaller publically traded US companies (as measured by the Russell 2000), your gains were only 5%. And markets of either developed international stocks or emerging market stocks went backwards (they lost money) in 2014.
Will those trends continue into 2015? Will the stocks that make up the S&P 500 continue to outperform other areas of the stock market? There are lots of opinions on both sides of that argument, but that’s all they are.
What I do know is that most experienced professionals will continue to counsel a broadly diversified portfolio for any amount of your wealth exposed to the stock market. By broad diversification, I mean owning the stocks of large, mid-sized and even smaller publically traded companies, most located in the US, but some located abroad. The exact proportions will depend on your goals and the approach taken by a specific portfolio manager.
It is important to remember that markets that go up (especially for a long period of time) may also go down. The reality (dare I say inevitability?) of price fluctuation should be taken very seriously for anyone committing any portion of their wealth to stock markets.
Your brother-in-law may fancy himself an expert in markets. Good for him. But the likelihood of your brother-in-law (or anyone else for that matter) being able to consistently predict the direction of the markets in the short term is…
Byron R. Moore, CFP® is managing director / planning group of Argent Advisors, Inc. Email him at firstname.lastname@example.org. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5800. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc.No forecasts can be guaranteed. Argent Advisors, Inc. does not offer tax, insurance or legal advice. The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.