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A NATIVE CHICAGOAN, I bailed out and am now a Southerner. Or at least a Florida Man. So I attend church each Sunday. If you attend church in the south, you will inevitably hear someone respond to a “how are ya?” with “well, I just keep on keepin’ on.”
With all the fanfare about this bull market, and especially large-cap technology stocks, it can be tough to keep on keepin’ on and stick to your long-term plan. Multiple financial news networks, finance Twitter and your neighbor Ted can, if you aren’t careful, trigger regret and cause fear of missing out, otherwise known as FOMO.
U.S. stocks had a stellar 2019, no question about it. But if an investor looks beyond U.S. large caps, returns haven’t been nearly as strong.
U.S. small caps have underperformed their large and mega-cap counterparts for more than a decade. Consider two exchange-traded index funds, Vanguard Mega Cap ETF and Vanguard Small Cap ETF. Over the past five years, the mega-cap fund is up a cumulative 80%, while the small-cap ETF is up “just” 52%.
U.S. value, historically a popular stock market tilt for those who pay attention to academic research, has lagged behind its growth counterpart over the same five-year stretch. Vanguard Growth ETF is up 93%, while Vanguard Value ETF is up a still respectable—but relatively disappointing—61%.
Foreign stocks have seen perhaps the biggest underperformance. Vanguard Total Stock Market ETF, a darling of the FIRE movement (to which I partially subscribe) is up 73% since early 2015, while Vanguard Total International Stock ETF is up just 27%.
Below are five-year annualized returns from Morningstar illustrating these sharp return differences. For grins, I included iShares U.S. Large Cap Growth and iShares U.S. Small Cap Value (and also to show I’m not playing favorites among ETF providers).
What is an investor to do with this data? “Nothing” may be the best answer, assuming you have a long-term plan in place. But if you’ve been dabbling in the market and not really following a plan, this may be the moment to set target portfolio percentages for different investments—and then make sure your portfolio matches those targets.
It’s easy to get caught up in the financial media’s hype and make short-term investment decisions based on emotion. Don’t. Even five years is short-term for most investors. For me, a 32-year old with no intention of tapping my portfolio for everyday expenses any time soon, I just keep on keepin’ on with my target asset allocation. My target allocation includes the underperforming sectors mentioned above, and I’m just fine with that.
Has it been a little challenging to see FAANGM (Facebook, Apple, Amazon, Netflix, Google, Microsoft—or whatever the latest catchy acronym for the biggest tech stocks is) surge higher, while other areas of my portfolio underperform? Sure. But I also know that my skill at timing the market is poor. I’m much better off ensuring I have a low-cost, diversified portfolio of index funds for the long haul based on my risk and return objectives.
In fact, I take some solace from knowing that not every area of the stock market is rocketing along like a runaway freight train. If they all were, I would feel like a crash everywhere was imminent. But it seems the frothiness of U.S. large-cap growth stocks has yet to seep into other areas of the global market. Still, a Florida Man can dream.
Mike Zaccardi is a portfolio manager at an energy trading firm and a finance instructor at the University of North Florida. He also works as a consultant to financial advisors on an hourly basis, helping with portfolio analysis and financial planning. Mike is a Chartered Financial Analyst and Chartered Market Technician, and has passed the coursework for the Certified Financial Planner program. His previous article was If Only. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn and email him at MikeCZaccardi@gmail.com.
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Loved the article. Will be interesting to see if mean reversion will happen in next decade.
What to do when the market finally drops? Convert some shares of your traditional 401(k) and IRA to a Roth 401(k) and a Roth IRA. The lower the market, the more shares you can convert, and then when the market comes back up, no more taxes on those shares. Much better to convert then than now. Just a thought.