For most of us, it is hard to go anywhere without hearing how "the market" is doing. We often mentally compare this with how we think our investments have done, and are either happy our account has outperformed, or frustrated it has underperformed. The problem with this quick comparison is two-fold: 1)Our investment objective, risk tolerance, and investment horizon are different than "the market" and 2)Our portfolio typically contains investments not included in "the market". So let's start with the basics. What is "the market"? The "market" usually refers to either the Dow Jones Industrial Average (Dow) or the Standard & Poor's 500 (S&P 500, or S&P, for short). Both of these are indices composed of a basket of very large, well known U.S. stocks - 30 in the Dow, and 500 in the S&P. These include weighted averages of stocks like Microsoft, Boeing, and Home Depot, to name a few. The purpose of these indices is to give us an estimate of the general performance of the U.S. stock market. Both indices track continual performance of stocks of U.S. companies (with a few exceptions in the S&P). Neither includes bonds, real estate, or any other asset class. From 2007-2009, when the market(S&P) took a plunge of 56% from peak to trough, most investors began to seek investments not tied to the market. Some left the market entirely, and have not returned. Others left, and have since re-entered. In retrospect, many wished they had not panicked and remained invested. Some however, feel they made the right decision, cutting their losses, and don't foresee ever returning to the market. Since that time, few have been interested in going "all in" the U.S. stock market. Most have looked to diversify in an attempt to reduce the daily fluctuations. Many investors are less concerned with matching market returns, and more concerned with preserving capital or receiving income. We use various bonds, (government, corporate, high-yield, and municipal) as well as MLPs, real estate, and structured notes. Unfortunately, Federal Reserve policies have brought down interest rates to an unnatural level, which has damaged the outlook for long-term investors. In the 1990s, annual returns of 10% were expected. This number decreased to 8% in the 2000s, and now most would be satisfied with a 4-6% annualized return. In order to achieve higher returns, more risk must be taken. Often, we forget the pain of 2008-2009 when making decisions to seek higher appreciation(it can't happen again, right?). We see the market charging ever upward year-to-date, and while your returns may not match those of the market, it is not until things turn sour we can see clearly the benefits of broad asset diversification. In examining your portfolios, Ailsa Capital looks at your investment objective - growth, income, capital preservation, etc. We take into account risk tolerance and investment time horizon. We then diversify your portfolio based on these criteria. We add foreign and domestic small, medium, and large company stocks, bonds, commodities, and other asset classes to reduce volatility, increase income, or achieve whatever your individual goals might be. As an investor, if you would like to see how your account is allocated (stocks vs bonds, foreign vs domestic, etc), please contact us. We can run a personalized illustration, showing your exact allocation. We can help you understand how your portfolio should perform in relation to the overall market (more or less risk, higher/lower yields, etc). In the meantime, when the talking heads rattle off market performance, consider that a quick comparison may not be accurate. While your portfolio often moves in the same direction as the market, its magnitude (and sometimes direction) is dependent on your portfolio allocation model. |