The underperformance of a diversified portfolio has been an issue for many years thanks to international underperformance, and owning lower return assets such as bonds. But even all stock portfolios are underperforming the indexes.
A major help when discussing performance is to put things into proper perspective. I strongly encourage the use of the Investor Preference Review. This helps when dealing with underperformance issues from a diversified portfolio that includes cash, bonds and all kinds of equities.
Another big talking point is how undiversified major stock market indexes are today. Because of the cap weighting nature of most indexes, this can be a problem. The “Giant 5” (Amazon, Facebook, Google, Microsoft, Apple) currently represent over 20% of the Wilshire 5000 (see graphic below). Contrary to its name, the Wilshire 5000 doesn’t contain 5,000 stocks. It contains “only” 3,415 stocks. But it is a representation of the total market. So 0.15% of stocks in the index represent over 20% of the moves. These five stocks comprised 10% of the index 3 1/2 years ago.
The S&P 500 is the most popular index and our benchmark for large stocks. The numbers for the “Giant 5” are very similar. The S&P 500 Index is roughly flat for the year. Yet, only a quarter of the S&P 500 stocks are positive year-to-date, not including dividends. That puts the median return at -12.6% — the average S&P 500 stock has performed worse than the index.
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