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  • gregblack11

The Short Term Trap

Today I had a great conversation with a client as we reviewed his recent portfolio statement. I thought perhaps you might have some of the same questions that he had and so I’m going to write the gist of the conversation below. Hopefully it will be as helpful to you as it was for him with how to evaluate your investments.  The client’s main concern was stated this way- “Greg, I saw the statements for the last quarter. The economy is booming and the market has been up so I was surprised to see such a minor gain in my accounts." Here is how I responded: "Thanks for reviewing the statements.  I’m always glad when people ask about their portfolio. It shows that they are involved. "As you pointed out, the economy is doing well. By saying 'the market has been up,' I assume you are referring to the S&P 500. And again you are correct. The S&P 500 had a great second quarter, it went up 2.88%. So the context of your statement is probably this: “With the S&P 500 having such a great quarter, why didn’t my portfolio have as great of a quarter?”  "The answer to that question is that your portfolio didn’t do as well as the S&P 500 or “the market” as the media calls it, because your portfolio is diversified between 21 different asset classes or “markets.”  "Your portfolio isn’t going to match the S&P 500 because, as you already know, all of your money isn’t invested in the S&P 500. Your portfolio will be outperformed by some asset classes in a given quarter, but it will also outperform other asset classes on a quarterly basis. That is the nature of diversification. "However, when the S&P 500 (US Large Companies) is the asset class that outperforms the portfolio, people are usually more concerned and aware of it because that is the most publicized asset class, and it is the asset class that is most familiar. The S&P 500 is also referred to as “the market” when in reality it is just one of the many existing capital markets. "Your portfolio is built to provide the highest expected return for your level of risk over a given period of time, typically 5-10 years. The challenge we have as investors is that we like to make short-term evaluations on a portfolio that is built for the long-term. It is the natural thing to do, but in the long run it really hurts investors. The key to successful investing is to stay more focused on the next 10 years than getting caught up in the next 10 weeks." So that is my response. It is probably more information than you wanted, but I think it points out the problem of falling for the short term trap! If you have questions or concerns regarding these ideas please reach out to me and we can schedule a call or meeting. Remember an educated investor is a more confident investor! Have a great weekend!