Why am I not Beating the S&P 500? – Carver Financial Services (2024)

Focus on Your Goals – Not Beating the S & P

The Standard & Poor’s 500 index, or S&P 500, is a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap equities universe. The question of why someone is not beating the S&P index generally comes up when the markets have continued to move higher, which is what we experienced in 2017.

Maybe That’s the Wrong Question

There are many answers to that question, which we get into below. But is this is even the right question to ask? A better question might be, is your goal to beat the index or to maintain your lifestyle and standard of living? Is your goal to beat the index mathematically or to accumulate real wealth? Are you happy making more than the S&P when it’s going up but potentially losing more when it goes down?

We believe a broadly diversified portfolio can provide a potentially greater level of return for any given level of volatility than a single asset class like the S&P 500 can over meaningful periods of time. Historical facts support this idea. When markets do well (or poorly) over one or two years, that is not indicative of long-term performance. Also, we believe that a portfolio must be designed to meet both your near-term and long-term income and growth needs — not just to earn a given rate of return.

So how long is “long term”? James Glassman, a Kiplinger columnist, says, “When you purchase a stock, you should think of yourself as a partner in the business forever — or until you need the cash. But forever, or even 30 years, is way out on the dim horizon. A more manageable view might be 15 years. If you invest $10,000 today in a stock that returns an average of 12 percent per year (a return that is 2 percentage points higher than the historic long-term return of S&P’s 500 stock index), you’ll end up with about $55,000.”

A Diversified Portfolio Can Outperform Large-Cap Equities Alone

The S&P index has been one of the strongest-performing asset classes recently. Therefore, if someone has a diversified portfolio, they are likely making slightly less than they would if they invested only in large-cap equities. On the other hand, when the S&P has gone down in the past, the diversified portfolio has likely outperformed large-cap equities and provided continued income to maintain investors’ standards of living.

It is also important to consider what your net income is for tax purposes. A properly managed portfolio can help mitigate income tax issues, whereas simply buying an index proxy (like an S&P index fund) cannot.

Focus on Your Personal Needs, Not on Indexes

We view a portfolio as a tool for helping you maintain and enhance your standard of living. So we are looking at maintaining the income you need over time, regardless of what the broader markets, including the S&P 500, do. We are also looking at returns over longer periods, which will include negative markets. November 2017 was the 13th consecutive “up” month, the best run for the S&P 500 since it ran off 15 straight months of gains from March 1958 through May 1959. While we are optimistic about the longer-term trend of the markets, there will be corrections, and we want to make sure these don’t impact your income or lifestyle.

With our practice the allocation of your portfolio is based on your needs, risk tolerance, tax situation and long-term goals. A portfolio that is just in the S & P 500 can be more volatile than a more broadly diversified portfolio, provide less income and may have negative tax consequences.

In the 70 years from 1947 to 2016, the S&P 500 had 27 declines of at least 10 percent but less than 20 percent, or once every 2.6 years. In the same 70-year period, the S&P 500 had 11 declines of at least 20 percent, or once every 6.4 years. The last “10 percent correction” for the S&P 500 was a 13.3 percent drop over the three months that ended on February 11, 2016. The last “20 percent or more bear” for the S&P 500 was a 56.8 percent drop over the 17 months that ended on March 9, 2009 (source: Yahoo! Finance).

We believe it is not what you make that is important, but what you keep net of taxes, fees and expenses. The S&P does not take these numbers into consideration.. If you earn 10 percent and the S P earns 12 percent, you may still be beating the S&P if you are in a 25 percent tax bracket. You cannot invest directly in the S&P index; you must invest in an investment that tracks it. Index funds and other proxies may have funds and expenses not reflected in the index itself. This adds additional expense and may have negative tax consequences.

Come to the Carver team for Custom Allocation

So why would someone maintain a portfolio lagging the S&P? Most likely because it’s not designed to beat the S&P Index — nor should it be. Unlike many practices, we do not use models. Instead we custom-allocate your portfolio based on your income needs, risk tolerance, tax situation and myriad other factors. Moreover, the portfolio is just one tool that can help you achieve your personal goals and vision. When the broader markets are doing well, it’s natural to compare your returns to the best index, but it’s not the best way to judge how you are doing and how you are positioned for the future.

Please contact us, without cost or obligation, to discuss your personal vision and how we can help you achieve it: Randy.carver@raymondjames.com or (440) 974-0808

The information contained in this blog does not purport to be a complete description of the securities, markets, tax rules or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Randy Carver and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk, and you may incur a profit or loss regardless of strategy selected. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow”, is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. Index performance does not include transaction costs or other fees, which will affect actual investment performance. You cannot invest directly in any index and past performance doesn’t guarantee future results.

Why am I not Beating the S&P 500? – Carver Financial Services (2024)
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