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One More Time . . .

02/17/2015

I’ve written this before.  In fact, whenever the stock market hits a new high, I have to write it again.

The S&P 500 was up 13% last year, but your portfolio was not.  Should you be unhappy about this?  NO!  In fact, if your portfolio was up that much, you should consider firing your investment advisor for taking too much risk.

Remember, if you took a little risk and had a 5% return, that was a good return.  However, if you took a lot of risk and had a 5% return, that was a lousy return.  As risk increases, so should returns, but how much risk do you want?  Seriously, how much risk do you want?

Since 1990, when it won the Nobel prize, Modern Portfolio Theory has demonstrated that risk can be minimized and returns can be maximized over the long-term by investing in multiple asset classes.  That means you should have some money invested in the stocks of big companies, of middle-sized companies, of small companies, of foreign companies, as well as some bonds, some commodities, maybe some currencies, and yes, some cash.

Anytime one of these asset classes hits a new high, some naive investors think their whole portfolio should have done equally as well.  Right now, the S&P 500 just hit a new high.  The S&P 500 is exclusively large-cap stocks.  If you are invested in large-cap stocks alone, you have taken too much risk.  If you are not invested in large-cap stocks alone, you didn’t get a 13% return last year.

So, how much risk do you want?

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