Updated: Nov 8
Are you feeling the same frustration I am? As advisors, we're given the daunting task of guiding investors towards successful investments, taking into consideration their risk tolerance and return expectations. This involves a meticulous client interview, followed by a comprehensive financial analysis, to arrive at an informed recommendation. More often than not, a diversified portfolio strikes the right balance between risk and reward. Depending on the client's investment journey, this may encompass various cap sizes, growth and value stocks, dividend-yielders, international equities, and bonds.
Sounds ideal, doesn't it? But as market dynamics shift, so do investors' emotions, especially when comparing their portfolio's performance to broader market indices.
Over the last 14 years, a select group of tech giants has redefined investor sentiment, rendering traditional portfolio theories obsolete. The FANG evolved to FAANG, then to FAANGM, and now the 'Magnificent 7'. These stocks, having consistently posted strong returns, have become pivotal. For instance, the Bloomberg Magnificent 7 Index surged by 83.90% YTD as of 9/30/23. Remarkably, they now make up nearly 30% of the S&P 500, which has grown 13.07% - predominantly due to these seven. To truly grasp their impact on the S&P 500, consider the Equal Weight Index, which yielded just 0.39%, presenting a clearer picture of broader market performance this year.
Investors are torn between the fear of losing money (FOLM) during downturns and the fear of missing out (FOMO) in bullish times. This year, many are fixated on either the S&P 500 or the Magnificent 7, leading to discontentment with diversified portfolios. Yet, these same investors desired a conservative stance in 2022 when the Magnificent 7 dipped by 46.89% and the S&P 500 by 19.95%. It's crucial to remember that even high- performing indices this year haven't yet compensated for 2022's losses. From 1/1/2022 to 9/30/2023, the Magnificent 7 and the S&P 500 have seen declines of 2.37% and 10.6% respectively.
Throughout my 40-year journey, I've observed that investors who impulsively abandon their strategies, lured by short-term gains, often increase their risks. They frequently capitulate during downturns, attempting to limit losses. Conversely, those who adhere to a well-devised plan, maintaining their risk-return balance through market highs and lows, fare significantly better.
With current market challenges such as aggressive inflation, fluctuating interest rates, unstable economic scenarios, escalating government debt, and rising geopolitical risks, it's imperative for advisors to ground clients in long-term visions, focusing on enduring returns.