Our clients sometime ask about their investment returns as compared to the S&P 500. At times, our returns seem to under-perform this widely published index.
Our portfolios hold investments in different "asset classes." These asset classes include US Stocks (large and small), International, Emerging markets, REITs and Bonds. By diversifying across these asset classes in the long term, we can both reduce the volatility of a portfolio and increase the return.
This is not always true, however in the short term. From 2010-2015 the S&P 500 had an average return of 13%. This return outperformed Dimensional Funds 100% stock "diversified" portfolio, which returned 10.2% during the same time period.
The reason for investing in a more diversified portfolio becomes more evident when we look over a longer period of time. When we look at these same two portfolios from 1973 to 2015 (the longest period where data is available) the returns flip. That is, Dimensional's 100% stock portfolio returned 13.3% and the S&P 500 earned 10.8%. So the more diversified approach would have done better by about 2.5% over that long period of time using our more diversified approach.
I always say that I can't predict short term returns, however over the long term returns tend to revert to the average. For this reason, I recommend a well diversified portfolio, using different asset classes such as we do on behalf of our clients.
The above is considered to be general tax/financial information and is not intended to be used as tax/financial advice. If you believe that any of the above applies to you, please consult with a tax or financial professional. See our Legal Statement.