If you've ever looked at a rising stock market and wondered why your own portfolio isn't doing quite so well, you're not alone. It's usually not a good idea to focus too much on short-term returns. But if you’re anxious about why the rising tide isn’t lifting your particular boat as much, it may be time to take a closer look at your investment strategy to better understand why you aren’t enjoying the same level of returns that you’re seeing in the headlines. It’s entirely possible that there may be something off about your investments. It’s also possible you just need a better understanding of how to measure your own performance.
To get to the bottom of this, it’s important to first understand the role that indexes like the S&P 500® play in evaluating investment performance.
What is an index?
When we talk about “the markets,” we’re speaking colloquially about the markets for investments, particularly stocks and bonds. Indexes like the S&P 500 and Dow Jones Industrial Average (DJIA) aren’t “the markets” themselves. In fact, they don’t even represent the entirety of what we consider “the markets.” They represent domestic (that is US-based) equities or stocks. Domestic bonds are represented by a different index, typically the Bloomberg Barclays US Aggregate Bond Index. Short-term investments may be represented by the Bloomberg Barclays Capital US 3-Month Treasury Bellwether Index and international stocks might use an index like the MSCI All Country World Index (excluding US).
“Most investors hold a mix of stocks, both US and international, bonds, and possibly short-term investments,” says Naveen Malwal, an institutional portfolio manager with Strategic Advisers, LLC. “If they are comparing their portfolio to a US stock index like the S&P 500, there is likely a mismatch. Because that index may not be a good representation of their portfolio. So investors need to ask themselves when looking at performance, ‘Am I comparing myself to the right numbers?’”
In other words, when you’re looking at the annual returns for the S&P 500, you’re only looking at the annual returns for a segment of the market—stocks. It’s not giving you the whole picture. If your portfolio holds a mix of different investments, you’re also not measuring all of your investments.
Knowing that, it’s not a great idea to compare the performance of a specific segment of the market, such as stocks, to your entire portfolio, which is likely made up of a variety of asset classes. Instead, you would need to evaluate the performance of each of the asset classes you hold against the appropriate benchmark. For example, compare your international stock investments to an international stock index and your bond holdings to an appropriate bond index. That would at least give you a better sense of whether your portfolio is performing in line with expectations. If you find that you’re substantially underperforming in that regard, then it may be time for a change.
Still worried about missing out?
Still, let’s say you find that the various asset classes in your portfolio are performing in line with or, in some cases, perhaps even exceeding their benchmarks, but your overall performance is still below that of the S&P 500 or DJIA. It may be hard not to feel like you’re missing out on potential gains. You may be tempted to shift to a more aggressive asset allocation, one that puts a greater emphasis on stocks and underweights more conservative asset classes, like bonds.
Sure, the S&P has shown positive performance recently, and has historically demonstrated positive returns. But stocks carry risk and that can be seen in the historical performance of the S&P 500. While 2023 and 2024 saw attractive positive returns, you only have to look as far back as 2022 to find a big drop—19.44%. If you don’t expect to need your invested assets anytime soon and think you can stomach the potentially turbulent ups and downs of the market, you might see such a decline as an acceptable bump in the road. But even those who believe they understand the risks they’re taking on can get skittish when things go south.
Changes to your asset allocation should not be made lightly, as the impact can be significant. Research shows that the strategy of selecting the percentage of stocks, bonds, and cash in a portfolio can be said to be responsible for more than 90% of the variability in portfolio returns.1
Remember, though, that your target asset mix involves your whole portfolio, not just individual accounts. For example, consider an investor who has two accounts of roughly equal value, one of which is composed entirely of stock that they received as compensation from their company. If they determined that their preferred target asset mix was, say, an Aggressive Growth strategy, then they may need to ensure that only 60% of their second account was made up of stocks to offset the fact that the stock allocation of the first account exceeds the 80% stock allocation of the target asset mix. As a result, the investor may experience more volatility in account 1 and slower growth in account 2. And they may feel that account 2 is significantly lagging the performance of, say, the S&P 500 in periods when markets are booming. But overall, their performance may be in line with their target asset mix and on track with regard to their long-term goals.
It can be difficult to keep the big picture in mind, especially if you have accounts at multiple firms or are planning with a partner who has accounts of their own. But it’s critical to ensuring that you are making informed decisions about how your assets are allocated. Failing to think holistically may lead to mistakes that could undermine your potential for growth.
Stay focused on your goals
Malwal suggests reframing your thinking around the tangible goal you’re trying to reach instead of focusing on the performance of an index.
“Let’s think about what you’re trying to achieve,” says Malwal. “Rather than focusing on beating a benchmark, let’s figure out how we can get you to your goal in a reasonable timeframe. Ultimately, the benchmark that matters the most is a personal one—were you able to retire on time, save enough for a down payment, or send a child to college.”
Rather than chasing returns in a particular asset class, investors should base their portfolio’s allocation on 3 criteria: their present financial situation, their tolerance for risk, and their time horizon—that is, how soon they expect to need the assets. A well-diversified portfolio constructed with these criteria in mind may help insulate you from some of the volatility of stock markets. This may make you less likely to pull your assets out of the market during tough times, which could help you ultimately reach your goal.
“One reason investors may not want to invest all their assets in a single asset class, such as stocks, is that the volatility can be difficult to endure,” says Malwal. “They may experience growth over time, but along the way there may be many periods where the market drops significantly. This kind of volatility can be distressing and may lead an investor to get out of the market entirely. Diversifying across different types of investments may still provide reasonable returns, but with less volatility along the way. That lower volatility may help investors stick with their financial plan.”
Those who are financially stable, comfortable with volatility, and saving for a far-off, future goal, may indeed benefit from a more aggressive, stock-heavy allocation. However, if big swings in the market make you queasy or you expect to need your assets in the next few years, such a strategy could be counterproductive.
Don’t take your eye off the ball
Historically, chasing attractive, short-term performance in higher-risk investments has led many investors down the wrong path. One long-running study has consistently shown that poor asset allocation decisions and attempts to enhance returns by timing the market have often led investors to consistently underperform the S&P 500 Index.2
“For some investors, an aggressive approach might be the answer,” says Malwal. “But for the vast majority, it’s likely that a well-diversified portfolio that incorporates asset classes beyond US stocks may provide a smoother ride and give them the confidence to stay with their plan and achieve their goals.”