The Market Is Up. Why Isn’t My Account?

If you are confused about what is happening in the U.S. stock market right now, you are not alone.

After suffering a significant drop in March and April, the S&P 500 index (SPX), a very commonly-used benchmark for many funds and advisors, and what many people consider to be “The Market” has recovered from the crisis and pierced the 2020 highs established in February.

However, for many individual investors, the result is not the same for their personal accounts.

In many accounts, the answer is as simple as asset allocation.

Since the SPX is a stock index, only a 100% stock portfolio would even have a chance of matching the performance of the index.

In fact, a popular asset allocation model using Vanguard Mutual Funds that we track internally lags behind the SPX. This asset allocation model begins each calendar year with a 60% allocation to stocks split between US and foreign with the remaining 40% split between Bonds, Treasuries, REITs and Precious Metals. Hopefully, few people invested in such an allocation would expect SPX-like performance.

Even if you do have an account that is 100% invested in stocks, it may still lag for several reasons.

Remember that the S&P 500 is considered a large-cap stock index. According to S&P Dow Jones Indices, the index’s manager, a company must have an adjusted market cap of $8.2 billion to be included in the index. Additionally, the stock must trade (change hands from a seller to a buyer) at a minimum volume of 250,000 shares in each of the six months leading up to the latest evaluation date.

If your portfolio is allocated between a number of large, middle and small cap stocks, as many are, your performance will likely be different than the index and, depending on which stocks you own, it could vary greatly.

Another thing to consider is that the index has a cap-weighted construction. This means its components are weighted according to the total market value of their outstanding shares instead of being equally weighted as many stock portfolios tend to be, at least at initiation. Those components with a higher market cap carry a higher weighting percentage in the index. Conversely, the components with smaller market caps have lower weightings in the index. Therefore, the performance of the index will be heavily influenced by the performance of the higher-weighted components.

Taking a glance of the index this morning on the website, we see that the top ten stocks by weight make up over 45% of the index weight.

Top Ten S&P 500 Components by Market Weight

Looking at the performance of those top 10, you see that seven out of those ten stocks are positive year-to-date.
The top 5 stocks on the list belong to the group of stocks known as FAANGM (Facebook, Amazon, Apple, Netflix, Google (aka Alphabet), and Microsoft).

FAANGM’s share of S&P 500 market cap alone is 37.23% as of today.

In other words, because the S&P 500 is a market-cap weighted index, the performance of these six stocks drives approximately one-third of the movement in the index. If the FAANGM stocks move higher, the S&P 500 is most likely moving higher. If the FAANGM stocks move lower, the S&P 500 is most likely moving lower.

So again, if your portfolio is weighted similarly with these six stocks, congratulations. If it isn’t, then do not be surprised that it is not keeping up with the index.

To that point, the S&P 500 Equal Weight Index (SPW) is down 7.6% as of July 31 versus a positive 1.25% for the cap-weighted index (SPX). Examining the full roster of stocks in the S&P 500, we see that 300 of them are down for the year, so this would make sense.

The final and most important point is your chosen strategy, or the purpose for your investment selections.

At Summit, this is an important conversation with our clients as purpose drives expectations. If you are investing primarily as a source of income, then your stock allocation is more likely to contain a healthy portion of dividend-paying stocks. Only two of the above mentioned FAANGM stocks pay dividends. Any income derived from the other four would have to come in the form of capital gains.

Therefore, you would have many other stocks in your portfolio that do not necessarily match the performance of either the market cap weighted or the equal weighted indices. The performance of those investments, while serving the purpose they are intended for, could be disappointing on a Total Return basis when comparing to what you think is “the market.”

As an example, the Dow Jones US Select Dividend Index (DJDVP) represents the stock performance of the US’s leading dividend-paying stocks and sports a current dividend yield of 5.15 % versus 1.86% for the SPX. The DJDVP is still down over 21% year to date. So, you must ask yourself, are you happy that many of these stocks are still reasonably priced by historic measures, or are you keeping awake at night because the market is leaving you behind?

The point is, to be a successful, long-term investor, you have to construct a portfolio that aligns with your particular needs and objectives and then employ the proper benchmarks in order to accurately gauge whether or not the portfolio is actually performing as designed.

At Summit, we use risk tolerance based allocations to gauge account performance as we have found that volatility is something that impacts client emotional reactions to performance in the short-term while the particular purpose of the portfolio, be it growth, income or safety, impacts their satisfaction in the long term.

So if you want to keep up with “the market,” invest in an index-linked fund or ETF that will do so. If you want to invest in a way that aligns with your personal goals and objectives, then ignore the market and choose a benchmark that will provide a better measure of performance.

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Three Piggy Banks

Here is a simple activity to start teaching your child the different ways of managing their cash flow and the consequences. This idea builds on an article I read before I even knew I was going to be a parent. It was written by someone writing under the name of Michael Masterson in one of the first email newsletters I ever subscribed to called “Early to Rise.”

Consider starting them on a weekly allowance.

By age five, your child is likely performing basic activities like brushing their teeth, dressing themselves and picking up their toys. We started our daughter with an allowance of $.25 per week. The allowance was not directly tied to activity but instead tied toward behavior. We created a Chore Board with 5 activities that we wanted her to take on:

  • Pick up your toys
  • Feed the dogs
  • Put your clothes in the hamper every night
  • Put your dishes on the kitchen counter
  • Brush your teeth

Make sure they understand the specifics of each of these tasks like not giving the dogs seconds or thirds even if it’s fun. Explain that they will get their allowance every week as long as they are helping out.

Try to give the allowance in increments of five (5 pennies, nickels, dimes, dollars, etc.). We recommend this for a couple of reasons:

  • Five nickels in your hand feels like a lot when you have little hands.
  • We want them to spend the money in a visual manner, meaning we want her to see a lot of money leave her hand whenever she buys something.
  • We want to teach them the idea of allocation. It’s easier to divide four quarters than a single dollar bill; or five, one-dollar bills versus a five-dollar bill.

Then get two or three piggy banks of approximately equal size. The article I read recommended two banks, but my wife and I both share a strong belief in supporting charitable causes, so we made it three. Label the banks as follows:

  • Savings (Glue the “withdraw” opening of this one shut)
  • Spending
  • (optional) Giving

Just a quick note, we have seen, and in fact our oldest daughter at one time received, a bank like this one pictured here, from a well-intentioned friend, However, as you’ll hopefully note below, this style of one-for-all bank doesn’t provide as much of a physical impact for the child as having the three separate ones.

Hopefully, the saving and spending banks are self-evident, savings is for the future when they will have large purchases or if they ever want (or need) to live off of what they have saved versus having to work (more on this later).

Spending is for anything they want, any time they want it, but only if they have enough to buy it without taking anything from the other two banks.

As for the giving bank, at the end of each year the kids count out the money in the bank and give it to us. Then my wife and I make a donation in our daughters’ names to whatever charity they choose. If the charity is local, we usually take them to the location and let them present the check in person. Often this has led to a tour in the case of a homeless shelter or food bank. This has had a profound impact on our oldest daughter who has become a bell-ringer for the Salvation Army during the holiday season to help fight homelessness.

When you give them their allowance, tell them that they can put as much as they want in each of the banks but that something has to go into each one (you’ll probably have to do this more than once).

After they have been able to build up some savings in the three banks, it is time to put the spending bank to use.

When they ask you to buy them something, you can explain that they can now use their spending bank to buy it for themselves (assuming the proposed purchase meets your approval). Write down the cost of the item they want to buy and explain that when you get home you can see if there is enough money available in the spending bank to purchase the item.

In my experience, the child will be shocked when they see how little money is left over after you count out enough to make their purchase. Quite often, they will decide that they really don’t want to buy the item as much as they originally thought and leave the money in the bank.

At some point however, they will make a purchase or two and they will begin to notice how the savings bank gets heavier and heavier while the spending bank never gets very heavy.

This is also a great time to introduce the concept of work to them. Make extra earnings available when they do specific jobs like pulling weeds, washing cars, dusting, etc. Try to give them as many opportunities as possible that are age appropriate. Then, when there is a special item they want to purchase, help them figure out how they can earn enough money to buy it.

You will find that over time, your child will become much more thoughtful about their savings and their purchases. They will also be very proud when they are able to buy things with the money they earned. Don’t be surprised when they tell the cashier that they are buying it with their own money.

When their savings bank gets full, “crack” it open together and count it out. Then take your child to your local bank or credit union and let them deposit it in their own custodial account. Have a place to let them keep their deposit slips and bank statements.

Talk to them about what they can do with their savings: their first car, paying for college, or even their own home someday.

Encourage them to use their imagination to consider whatever excites them. Setting a goal is a good idea and it won’t be long before they are giving you progress reports on how close they are to reaching it!

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