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Do you find yourself comparing your investment portfolio returns to those reported by the news?
Almost everyone does, yet it’s akin to comparing an apple with a steak. They are both types of food, but each has very different characteristics.
One of the most underrated risks for investors is what might be termed ‘TV risk’, or the risk associated with relying on the ‘news’ for market guidance.
Most financial ‘news’ focuses on the performance of the Dow Jones Industrial Average. The Dow consists of 30 very large stocks (3M, Boeing, Apple, Merck, etc.) out of more than 3,600 publicly traded U.S. companies.
You probably think of the ‘market’ being up or down any given day based on the performance of the Dow. Yet, it’s a very poor measure of the overall stock market.
If you want a more expansive view of the stock market, the Standard & Poors 500 Index might be where you turn. The S&P consists of the largest 500 stocks by market size like Tesla, Netflix, Best Buy, and Etsy.
But even the S&P 500 isn’t a very accurate gauge of the broad stock market. If the U.S. stock market was a 10-ounce bottle of water, the Dow and S&P combined would make up less than 2 ounces. The thousands of stocks that make up the remainder of the market are essentially the other 8+ounces in the water bottle. The overwhelming majority of stocks aren’t in either of these indices.
The broad stock market consists not only of large companies, but also many smaller stocks.
Of course, nearly half of the investment opportunities in the world exist in non-U.S. stocks. There are over 40,000 publicly traded companies in dozens of countries across the globe. There are times when global stocks perform well when U.S. stocks lag and vice-versa. That’s one of the reasons for global diversification. Over long-time frames, investors generally benefit from consistent exposure to both U.S. and non-U.S. stocks.
Since your investment portfolio likely isn’t 100% stocks, comparing your portfolio solely to stocks can be misleading. There are many good reasons for holding a balanced portfolio consisting of both stocks and bonds.
While stocks and bonds have distinct risk characteristics, owning a combination of both can allow you to stay invested during the inevitable difficult markets. Practicing patience as an investor allows you to harness a superpower that escapes many investors. There will be days, weeks, months, and years when staying in the market is a challenge.
Historically, a balanced portfolio, such as 60% stocks and 40% has fewer negative years and often has returns at or above a portfolio with 100% stocks.
One of the most prevalent, yet least recognized risks that you encounter as an investor is the risk of comparison. Your specific financial goals are unique and your time horizon is different too. Pay attention to how you are progressing toward YOUR goals and ignore everything else.
Related: Is Your Personality Getting in the Way of Long-Term Investing Success?