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Everyone knows that markets have been in the dumps this year.
But did you know if you look back at the trailing 12-months from the end of November (11/30/22), the Dow was actually up 0.31%?
While we always seem to focus on the calendar year as a start/stop date when evaluating performance, it’s somewhat irrelevant to an investor who’s looking to grow their wealth.
As of 11/30/22, the Dow was down -4.81% YTD. Now compare that to the Nasdaq, down -26.70% YTD. If the year ended on 11/30/22, this would have been the SECOND largest positive spread of the Dow to the Nasdaq since 1973 (the year the Nasdaq started publishing data).
That’s a big difference…about a 22% spread. And that’s just price returns which doesn’t account for adding in dividends.
The largest positive spread took place in…drumroll…2000.
How about the opposite?
The two largest years of outperformance for the Nasdaq over the Dow came in 2020 and 1999, where the Nasdaq outperformed by 36% and 63% respectively.
Ok, so here’s the “So what?!” part…
Consider this…
Meta: 52 week high $352.71, currently $122, needs to increase 187% to get back to the high
Google: 52 week high $152, currently $101 and needs to increase 51% to get back to the high
Apple: 52 week high $183, currently $147 and needs to increase 25% to get back to the high
Amazon: 52 week high $177, currently $92 and needs to increase 94% to get back to the high
Netflix: 52 week high $632, currently $318 and needs to increase 99% to get back to the high
With that in mind, two things matter: Diversification & Stocks
First, diversification matters. A good portfolio has several pistons in the engine and together, they go up and down to make the car go forward. Right now, investors who overconcentrated in big popular tech names are hurting way more than investors who for example, hold a portfolio of dividend paying stocks. That pendulum will swing back and forth but sometimes the best time to make a comment about diversification is when that pendulum swing is at its apex.
Second, stocks matter. Just as I saw in 1999-2000, a lot of individual investors start catching FOMO (fear of missing out) and start buying or over concentrating in the highflyers. I get it, it’s not easy to watch stocks you don’t own keep going up and it’s even harder to part ways with them when they keep going up. Like diversification, that pendulum will swing back and forth but sometimes the best time to make the comment about overconcentration (and frankly overconfidence) is when that pendulum swing is at an apex.
Point – it’s easy to get overconcentrated when stocks are going up 1) overtly by falling in love with them and loading up or 2) covertly through normal growth within a diversified portfolio.
Have a solid, unemotional plan and process to deal with that.
Related: What the UK Debt Crisis Teaches Us About Managing Debt Costs