From Glen’s Desk - April

You may have read or heard about the Magnificent Seven—a select number of tech stocks that have received quite a bit of media attention lately. While the Magnificent Seven are the topic du jour, it has been proven time and again that anytime an investment fad becomes the object of public fixation, investors are left asking themselves why in the world they own anything other than the latest hot stock.

In the last several years, Bitcoin, Ark Invest funds/ETFs, pre-development condominiums in Scottsdale, internet stocks like AOL, and Cisco Systems have all captivated financial journalism and public opinion. At some point or another, everyone wanted to get their hands on these stocks. Today, though, it is hard to imagine that some of them were ever popular.

More recently, I have heard speculation about the Standard and Poor’s 500-Stock Index. Many people are wondering why, when this index comprises the stock prices of five hundred of the leading companies in America, we would ever invest in anything other than the S&P 500.

If you, like many others, are wondering why your financial adviser does not get the full return of the S&P 500 or why they resist your impulse to sell off everything in your portfolio to invest solely in the S&P 500, I hope I can provide some clarity.

First and foremost, your stocks are diversified by financial advisers according to your individual risk tolerance levels. Diversifying broadly across different industries, indexes, and individual stocks manages your risk. Here at GDS Wealth Management, we remind our clients that diversifying into international, emerging, and small-cap markets will historically mute the volatility of your portfolio in both directions while also taking advantage of the long-term returns in those other sectors.

This classically conservative approach has muted the upside of long-term equity investing over the past several years. U.S. large company equities have shot out every light in the joint while the portfolio diversifiers stayed dark. This is not a cause for panic; it just means that your portfolio is doing exactly what it’s supposed to do. Sometime in the future, these diversifiers will have their moment to shine while large-cap growth fades, even if only temporarily.

Simply because it is taking a while for this strategy to play out does not mean that it is an invalid or flawed approach. Particularly if you are looking towards a multi-decade retirement, it may be useful to remember that successful investors understand that the stock market is not for the impatient. Hold fast to the course.

So, why might your financial adviser not have invested all your money in the S&P 500? The answer is simply that your adviser is a rational investor who understands that liquidating sound out-of-favor, and possibly undervalued, investments to chase popular, and possibly overvalued, sectors is not a wise move.

I will leave you with one final note. Twice in one decade this century, the S&P 500 declined peak-to-trough on a closing basis of 49% and 57%, respectively.¹ When COVID-19 hit, it went down by a third in only one month.² Just over two years ago, it crashed by 25% in ten months.³ Are you quite certain you want your entire invested net worth in that? I know that I don’t. But I’m not trying to outperform anyone or anything else—I’m just trying to outcompound them in the long run.

If you have questions about your investment holdings, don’t hesitate to reach out to one of our skilled financial planners here at GDS. We would be happy to discuss your investments and financial plan. Contact us at (469)212-8072 or visit www.gdswealth.com.

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¹ Forbes, 2023.

² CNBC, 2021.

³ Nasdaq, 2024.