Every year educated “professional” money managers attempt to beat the benchmark of the S&P 500 index. Active stock managers, as a whole, have failed to beat the S&P 500 each of the last nine years — trailing by an average of 1.7 percent per year.* Individual investors have fared even worse according to research done by Dalbar. The average mutual fund investor significantly under performs the market due to fees and poor market timing decisions.
The S&P 500 has been a fantastic investment over the past 10 years, averaging about 16 percent per year for the decade that ended March 31. Unfortunately, most investors did not receive anywhere near the full benefit. Even fee-conscious, diversified, and disciplined investors have not kept pace with the S&P 500 because most diversified portfolios had exposure to other asset classes such as bonds and international equities that have not performed nearly as well as the large American stocks that comprise the S&P 500.
So, what can we learn from this? It may seem like investors should just invest in the S&P 500 index and call it a day. This strategy has a couple flaws; first, many investors can’t tolerate the risk of investing all of their assets in stocks. After a decade of averaging 16 percent per year and relatively high valuations, the next decade may not be so rewarding. Secondly, both international equities currently trading for about 12.4 times the earnings and emerging market stocks trading at 10.5 times the earnings appear to be much cheaper than U.S. stocks at 15.3 times the earnings.**
While an argument can certainly be made that the relative stability of the U.S. affords its stocks a justified premium, at some point any asset class can become overvalued and, if history is any indicator, whenever asset classes enjoy prolonged periods of outperformance, they are often followed by long periods of underperformance — which is why most professional advisers typically recommend sticking with a diversified portfolio.
**Capital Group data as of 11/30/2018
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