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A Closer Look at the S&P 500’s Dominance

During extended bull markets like we are experiencing now, many investors ask why they need financial advice when it appears that superior performance at a low cost can be found by simply investing in an S&P 500 Index-linked fund.

It’s easy to forget that different markets do well at different times and that market leadership rotates and can last for long periods. The chart below highlights the performance of three major equity market segments over the last 22 years, with the S&P 500 representing US Large Cap stocks, the Russell 2000 representing US Small Cap stocks, and the MSCI EAFE (Europe, Australasia, and Far East) representing international developed stocks.

PERIODS OF MARKET LEADERSHIP OVER 22 YEARS  (January 1, 1995 – December 31, 2016)


Source:  S&P Dow Jones Indices LLC, FTSE Russell, MSCI Inc.

The analysis shows stretches of market leadership that can last from 4-6 years where one equity market outperforms the others, with differences in annualized performance ranging from 7%-17% from the best to worst markets. Over this 22-year period, buying and holding the S&P 500 Index would indeed have produced the highest return, delivering a 9.6% return. However, an investor doing so would have had to endure a period of nearly 14 years where the S&P 500 underperformed at least one of the other two broad markets. 

While the S&P 500 has delivered an impressive 17.8% annualized return since the Financial Crisis lows in March 2009, that figure pales in comparison to what the S&P 500 did leading up to the Tech Bubble in the last half of the 1990’s, when the index returned 27.6% annually.  Following that remarkable run, the S&P 500 underperformed the Russell 2000 Index by 10.8% annually for nearly five years, then underperformed the MSCI EAFE Index by 8.2% annually for the next four years.

It is appealing to think that you can just buy an S&P 500-linked investment and hold it for 20 years, but performance uncertainty makes that very difficult. Ultimately, a disciplined approach and a long-term perspective are necessary to achieve investment success. 

From the Behavioral Viewpoint

What is going on?

  1. Heuristics is a mental shortcut that allows people to solve problems and make judgments quickly and efficiently when faced with complex problems. This can take over our thinking and lead to poor decisions. The S&P 500 becomes all equity investing and we substitute the simple measure of cost for the more complex questions of what are we investing in and why.
  2. The massive media focus on the S&P 500 Index along with daily price movements, and accelerating industry marketing of index funds creates an availability bias that everyone is buying low cost funds. This is further validated by fund flow reports that reinforce our herding mentality. If everyone else is doing it, we should too!
  3. There is a recency bias favoring the S&P 500 Index as it has been beating other markets in recent years. Fueled by the FANG “Facebook, Apple, Netflix, Google” narrative and the endless chant that active management can’t outperform the index plays into our confirmation bias. We want to believe it, so it must be true.

What can we do?

  1. Use a needs-based planning approach to design investment portfolios with a strategic asset allocation based on long-term goals to help avoid emotional reactions to market noise and media hype.
  2. Acknowledge that although at times it seems like one type of investment or asset class will dominate into the foreseeable future, things can and do change. View current market conditions in the context of a longer-term perspective.
  3. A professional financial advisor who has lived through many market environments can provide valuable perspective and act as a trusted resource and coach to help investors stay on track.

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The information provided here is for general informational purposes only and should not be considered an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. It should not be assumed that recommendations of AthenaInvest made herein or in the future will be profitable or will equal the past performance records of any AthenaInvest investment strategy or product. There can be no assurance that future recommendations will achieve comparable results. The author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions. AthenaInvest disclaims any responsibility to update such views. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of AthenaInvest.

You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives financial circumstances. You should consult with a qualified financial adviser, legal or tax professional regarding your specific situation. Investments involve risk and unless otherwise stated, are not guaranteed.  Past Performance is no guarantee of future results.



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