The Investment Scientist

Beyond the S&P 500

Posted on: November 4, 2009

Look beyond comfort zoneIf you are like most investors, your equity portfolio will have a few auspiciously named stock funds and a few company stocks you feel comfortable with. You think you are well-diversified, but you really are only investing in the universe of the S&P 500 – the largest 500 stocks of the US equity market.

No wonder stock investing has not been all that enjoyable for you over the last decade. With two major bear markets, the S&P 500 is 7.7% below where it was 10 years ago.

However, if you had diversified beyond your comfort zone and included in your portfolio such asset classes as small cap value stocks, international stocks and emerging market stocks, you would have done much better!

The following table summarizes the 10-year return of these various asset classes.

ASSET CLASSES TOTAL 10-YR RETURN
S&P 500 -7.7%
Fama/French US Small-Cap 84.2%
Fama/French US Small-Cap Value 132.9%
MSCI EAFE (ex-US developed markets) 30%
MSCI EAFE Small-Cap 87.3%
MSCI EAFE Value 56.5%
MSCI Emerging Markets 168.1%

You can learn two lessons from the table above.

The wrong lesson: Since emerging markets had the best total return, let’s put everything in emerging markets. (The WSJ reported that two-thirds of mutual fund inflows in the last six months have gone to emerging market funds – evidence that most investors have learned the wrong lesson.)

The right lesson: Diversification (across all major asset classes) works!

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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