All too often, we hear the term “the market” being used by the most concentrated of its definitions. It is commonplace to refer solely to the Dow Jones Industrial Average as “the market”. The truth is the Dow, while a decent indicator of what is occurring in U.S. large cap growth stocks, is far from the total stock market available to investors.
As of December 31, 2009, the world stock market represented approximately $28.6 Trillion in market capitalization. All U.S. stocks, including large, mid and small-cap comprise just 42% of that market. A truly diversified portfolio has broad exposure to as much of the overall world market as possible in markets that are reasonably stable, liquid, and available at a reasonable cost.
For example, within our moderate portfolio containing 60% equities and 40% fixed income, the thirty stocks that comprise the Dow made up 3.41% of the portfolio as of March 31, 2010. Concentrations in the Dow across the full range of our allocation models measure from a high of 5.55% all the way down to 0.91% as of that same date. That means in a $1 million portfolio, somewhere between $9,144 and $55,482 is invested in those 30 stocks via the funds we use at any given time when balanced.
It is very tempting to allow our emotions to be controlled by the daily fluctuations of the Dow. It is the most widely reported indicator in the US media market and what we hear about on drive-time radio, the evening news and most other daily reports on “the market”.
We preach diversification and know that our clients appreciate and understand the value in having a broad, total market approach to their investments. But sometimes a disconnect exists in what we allow to drive our emotions on a day to day basis. Confusion over why a portfolio actually increases on a day when “the market” is down or vice versa is fairly common.
The fact is that looking at the market’s performance on a daily basis is an unhealthy exercise to begin with, but that’s a different discussion for a different day. If you are a market watcher, make sure you take a moment to realize what “the market” truly represents in your portfolio. If you find your emotions rising and falling each day based on what occurs to just 30 companies, ask yourself what the significance is to your overall portfolio and you’ll hopefully find your pulse slowing.