29 Jan Asset Allocation Mistakes – Chasing Index Returns
2019 was a stellar year for the major market indices, but it was also a year of tremendous risk. The S&P 500 (stock market that measurers out the stock of 500 major companies) saw 5 companies (Alphabet, Amazon, Apple, Facebook, and Microsoft) account for 24% of the entire 2019 gain of the index. In other words, this group of companies, which makes up 1% of the S&P500, accounted for almost one-quarter of the total return!
The reality is that, the inherent risks within a broad based market index are not often apparent and it is quite likely that the composition of these indexes is not compatible with the average investors needs and risk tolerances.
Durden putting the spotlight of the perils of individual investors chasing Equity Market Index returns was the highlight of the article. Not every point he makes hits the mark, but there are a few assertions that bear repeating (albeit in more descriptive terms).
Here are the Top 5 Reasons Why Chasing Equity Market Index Returns Is Folly extrapolated from Durden’s work:
1. Equity Market Indexes contain no cash – EVER
2. Equity Market Indexes have no life expectancy requirements – You do
3. Equity Market Indexes do not have a need at any point to meet or aid with living requirements – Every investor, at some point, relies on their portfolio for income, emergency needs, etc.
4. Equity Market Indexes pay no tax or expenses associated with it – This is not reality for an individual investor
5. Equity Market Indexes have the ability to replace investments within the Index without penalty – Doesn’t every individual investor wish they could simply eliminate the worst performing stocks in their portfolio without any repercussions?
The point is that every investor has little to nothing in common with an Equity Market Index.
You have your own needs and deserve to have a portfolio tailored specifically to those needs.
In short, asset allocation of your portfolio matters equally so in years when the indexes are doing very well as they do when the major market indexes are floundering.
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