Is Your Portfolio Still Down More Than 10 Percent in the Coronavirus Market?
Then Your Advisor Has Some Explaining to Do!
Peter Mougey says you should never accept the "whole market is down" excuse from your advisor. He debunks some common misconceptions about what "the market" really is, what real diversification looks like, and how to push back if you're down more than 10 percent.
Peter Lynch was one of the best growth investors of all time. As the Magellan Fund manager at Fidelity Investments between 1977 and 1990, he averaged a 29.2% annual return. Q1 2021 hedge fund letters, conferences and more The fund manager's investment strategy was straightforward. He wanted to find growth companies and sit on them Read More
What To Do When The Whole Market Is Down
Pensacola, FL (June 2020)—The S&P is back up (for now), but not too long ago the roller coaster was speeding downhill. When the market started spiraling a few months back, you clicked on your account, saw a massive drop in value, and put in a panic-stricken call to your advisor. When you finally got ahold of them, they said, "Eh, what are ya gonna do? The whole market is down. It's just out of our control right now. Don't you watch the news?" Of course, the next piece of advice is, "Don't get out now! You don't want to sell when it's rebounding!"
It's been a stressful ride for sure. But Investors' rights advocate Peter Mougey—a national securities and investment fraud attorney with Pensacola, Florida's Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor, P.A.—says you should never have been on the roller coaster to begin with. What's more, "The whole market's down" is not a free pass. If you're truly diversified, your retirement account shouldn't have been down more than 10 percent. A diversified portfolio of stocks, bonds, and cash for retirees or investors near retirement age should not have losses at this point.
"Let's get two things clear up front," says Mougey. "One, people use the word 'diversification' to mean that you're well-balanced between stocks, bonds, and cash. That's really only a small piece of the diversification picture.
"Second, people say 'the market' as if it's a single entity," he adds. "It's not. There are actually around 5,000 indexes in the U.S. equity market and millions globally. Granted, there are only several major ones—but even inside those there's a lot of variance."
The indices are made up of various industry sectors containing different-sized companies. Also, each index has different weights to each industry sector. For example, some indices are heavily weighted in tech, others in energy.
"Usually what happens is a few sectors are doing poorly, not the entire market," notes Mougey. "For example, in the market crash of 2000, if you had removed tech stocks from the S&P 500 picture, the market would have looked somewhat normal."
Mougey says being truly diversified also means your investment portfolio is:
a) appropriately weighted similar to the major indices so your portfolio has exposure to different kinds of companies in different lifecycles
b) diversified across all industry sectors similar to the sector weights in the major indices
c) diversified in terms of the size of the companies that make up those sectors
To illustrate, here's a quick look at four major U.S. indices along with how they've recently performed—and why.
INDEX: Standard & Poor 500.
The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80 percent coverage of available market capitalization.
YEAR-TO-DATE PERFORMANCE: We are back to January 2020 market level.
"Here is where you can see the difference weighting makes," says Mougey. "Across the board, the energy sector is down almost 29 percent and financial is down almost 18 percent, yet they have relatively 'light' weighting inside S&P. On the other hand, IT is up 11% and healthcare is up a little as well—and you can see how heavily weighted they are. As a result of all this, performance in this index is flat, or almost back to zero year-to-date."
|Sector||Index||Weight of each sector per 6/9/2020||YTD Performance
|Large Blend||S&P 500 Index||-1.70%|
|Energy||S&P 500 Energy Index||3.21%||-28.86%|
|Financials||S&P 500 Financials Index||11.07%||-17.90%|
|Industrials||S&P 500 Industrial Index||8.30%||-12.07%|
|Materials & Processing|
|Utilities||S&P 500 Utlities Index||3.16%||-4.18%|
|Real Estate||S&P 500 Real Estate Index||2.91%||-3.78%|
|Consumer Staples||S&P 500 Cons Staples Index||6.90%||-3.66%|
|Materials||S&P 500 Materials Index||2.56%||-3.56%|
|Health Care||S&P 500 Health Care Index||14.43%||0.57%|
|Communication Services||S&P 500 Comm Svc Index||10.80%||1.57%|
|Consumer Discretionary||S&P 500 Cons Discret Index||10.63%||6.69%|
|Information Technology||S&P 500 Info Tech Index||26.02%||11.24%|
INDEX: The Dow Jones Industrial Average.
The Dow Jones Industrial Average index is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
YEAR-TO-DATE PERFORMANCE: A 6% Percent Decline
"The Dow is typically looked at as an old-school index and out of date," says Mougey. "It has only 30 companies, and no sector groupings, so it's not very illustrative. Still, when you look at the recent poor performance of companies like Boeing, which is down almost 33% percent, you can see why the Dow is performing so poorly right now."
|30 Stocks included in Dow Jones Industrial Average|
|JP Morgan Chase||-19.41%|
|Procter & Gamble||-4.02%|
|Johnson & Johnson||1.41%|
INDEX: The NASDAQ Composite Index.
NASDAQ is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market, and Capital Market.
YEAR-TO-DATE PERFORMANCE: Up 10 Percent
"NASDAQ hasn't really been impacted by coronavirus volatility because it's weighted to almost 50 percent information technology," explains Mougey. "Right now, if you have a NASDAQ-type portfolio, you're doing really well. On the other hand, if you had this type of portfolio back in 2000 during the tech bubble, you got crushed."
|Index||Weight of each sector per 6/9/2020||YTD Performance
|NASDAQ Composite Index||10.12%|
|NASDAQ Bank Index||1.93%||-24.81%|
|NASDAQ Insurance Index||0.73%||-14.51%|
|NASDAQ Other Financial||3.50%||0.66%|
|NASDAQ Industrial Index||32.04%||11.01%|
|NASDAQ Transportation Index||1.17%||-9.88%|
|NASDAQ Health Care Index||10.15%||9.68%|
|NASDAQ Telecomm Index||3.03%||8.10%|
|NASDAQ Computer Index||47.44%||13.62%|
INDEX: The Russell 2000.
The Russell 2000 index is comprised of the smallest 2,000 companies in the Russell 3000 Index, representing approximately 8 percent of the Russell 3000 total market capitalization.
YEAR-TO-DATE PERFORMANCE: An 11 Percent Decline
"Smaller companies are far more volatile than the big players," says Mougey. "They blast off, but they also crash and burn. With the economy depressed, it's no surprise smaller companies are struggling, which means it's no surprise the Russell 2000 sectors are performing poorly."
Bottom line: It's risky to have too much invested in any "type" of industry sectors, in too many small companies (especially if you're at or near retirement due to the higher volatility they bring), or even in too many big companies. (Over the long-term, small caps can outperform large caps, but by having a weight to companies of all sizes, you can reduce volatility without sacrificing returns.)
If your portfolio is overweight particular to any industry sector, your advisor might be what Mougey calls a "stock jockey," meaning they believe they can pick stocks better than the rest of the market.
"This is just a single moment in time," asserts Mougey. "If you happen to be heavily invested in technology right now, you've done well over the past few months because we were all sitting home ordering from Amazon and surfing Facebook. But no advisor could have predicted this would happen, nor can they predict what will be going on a year or five years from now. No one can time the market. They might get lucky in the short run, but over the long run, stock picking doesn't work. Instead, asset allocation and diversification prevent wild swings without sacrificing returns."
So if you're down more than 10 percent, what should you do? Here's Mougey's advice:
"Ask your advisor for a list of S&P 500 industry sectors, their weights, and their performance," he says. "Next to each industry sector, ask your advisor to list the weight of your portfolio and how you have performed. This first step should highlight the problem. If not, dig deeper and look at your portfolio's weight to international stocks and smaller companies.
"If you still don't feel satisfied, seek a second opinion," adds Mougey. "Bottom line, don't accept the 'whole market is down' excuse, because a well-diversified portfolio with an allocation to investment-grade bonds shouldn't fall more than 10 percent."
Peter Mougey is a partner in the Pensacola-based law firm Levin Papantonio and the chair of the firm's securities department. He concentrates his practice in the areas of complex litigation, financial services, securities litigation, and whistleblower or qui tam litigation.
He has also served as chairman of the NASAA Committee, Executive Committee and FINRA's Improving Arbitration Task Force. Currently, Mr. Mougey serves on the PIABA Foundation charged with educating investors in conjunction with the SEC. In recognition of his long-term and sustained dedication to promote the interests of investors, he received the PIABA Lifetime Distinguished Service Award from his peers.
Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor, P.A., has been in existence for more than 65 years. It is one of the most successful plaintiff law firms in America. Its attorneys handle claims throughout the country involving prescription drugs, medical devices, defective products, securities, and consumer protection.
Based on law firm verdicts and settlements exceeding $4 billion, its securities fraud lawyers are committed to seeking justice for the victims of investment fraud and misconduct. Led by attorney Peter Mougey, the past president of the national securities bar PIABA, the securities and business tort department has represented more than 1,500 investment fraud victims across the country in state and federal court and securities industry arbitration.
To learn more, please visit www.levinlaw.com.