By Maurice Stouse
On a recent visit to Raymond James’ headquarters in St Petersburg, Fla., the Asset Management Services team pointed out its approach to the planning they offer to Financial Advisors and their clients. We found that to be somewhat thought-provoking, particularly if you look at certain stocks or sectors in the recent past.
Some of the most common questions we hear from investors are anything from, is the market overvalued at the top? When is the best time to invest?
We have noted before that timing the market is next to impossible. It is time in the market vs. timing the market that tends to lead to consistently good performance to occasionally great performance.
What about asset selection? Why not just invest in an index fund and not worry about individual security selection or fund selection? An S&P 500 index fund will represent 80% of the value of the U.S. stock market. Many would find it hard to argue with utilizing this approach. What about the risk of the S&P 500 index today vs. years past?
To put that into perspective, we did a little research and found some interesting contrasts for the market today vs. say 30 years ago. The top 5 stocks in 1994 were GE, Exxon, Coca Cola, Merck and IBM. Today, the top five are Apple, Nvidia, Microsoft, Amazon and Meta (Facebook).
The top 5 stocks 30 years ago accounted for about 10% of the value of the market (based upon the S&P 500). Today, the top five account for about 30% of the market.
Thirty years ago, the top sectors were industrials, energy and consumer staples. Today the top three are technology, health care and financials.
So, the way we see it, the market today is much more heavily weighted with fewer stocks and the top sector (technology) accounts for about a third of the market’s value. Thirty years ago, the top sector was 8-10%.
So, what is a growth-oriented investor to do? We think that once someone has confirmed the big three: Investment objective, risk tolerance and time frame, asset selection should not be heavily weighted toward any one stock or sector, and to take a more value-oriented approach. By that, we mean to look at a variety of the metrics that are available (through your own research or with the help of a financial advisor) to determine if a stock is undervalued, valued fairly or overly valued.
While there is always the risk of being overly weighted, such as today’s market, there is also the risk of being too spread out, in other words, overly diversified.
Is there a “right” number of stocks in a portfolio? That is difficult to answer; but, one rule of thumb would be approximately 20 or fewer. The alternative approach would be to invest in to mutual funds and we conclude, from observation, that that number is five or fewer.
The focus, to get to consistently good vs. occasionally great, takes consistency, time and patience. It also means to ensure that your portfolio does not grow out of the intended balance over time. To that end, periodic review, in line with the big three might help you experience the results you want and desire.
Maurice Stouse is a Financial Advisor and the branch manager of The First Wealth Management/ Raymond James. Main office located at The First Bank, 2000 98 Palms Blvd., Destin, 32451. Phone 850.654.8124. Raymond James advisors do not offer tax advice. Please see your tax professionals. Email: Maurice.stouse@raymondjames.com.
Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, and are not insured by bank insurance, the FDIC, or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. The First Wealth Management and The First Bank are not registered broker/dealers and are independent of Raymond James Financial Services.
Views expressed are the current opinion of the author and are subject to change without notice. The information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. Raymond James advisors do not provide tax or legal advice. Please see a tax professional for advice specific to your own situation.
There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Future investment performance cannot be guaranteed, invest yields will fluctuate with market conditions. Investing involves risk and you may incur a profit or a loss regardless of strategy selected, including diversification and asset allocation. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered to be representative of the U.S. stock market. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.
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