We discuss, from time to time, what is meant by the term ‘the Market’, and the first point is that there is no single ‘market’ that represents most portfolios. So, as a starting point, here are a few definitions for you, and then we’ll get to why your portfolio is different from ‘the Market’.

The Dow Jones Industrial Average*- (DJ-30 on the Chart below)

It’s the oldest major index and the big numbers get people’s attention. It began life in the late 1800’s as an index of 30 railroad stocks- (the ‘tech’ stocks of the time!’) It has changed a lot over the years, but still although it is the granddaddy of modern indexes most financial people agree that in today’s diverse world 30 Dow stocks is not a very good representation of ‘the market’.

The S&P 500 Index*- (SP-CP on the Chart below) 

The S&P 500 Index is a more reasonable representation of what’s going on in ‘the Market’. Having (about) 500 stocks in the index, rather than a mere 30, it can more accurately reflect the various elements that actually impact most investors. The S&P is known as a “Cap-Weighted” index and that can get a bit confusing. On any given day, if one multiplies the price of a share of a company’s stock times the total number of shares the resulting figure is (VERY theoretically) the value of the company, expressed as ‘market capitalization’. Some of the S&P companies have market caps (values) greater than $1 trillion, and the smallest of the S&P companies have market caps of $6 or 7 billion. One of the simplest methods of investing is to buy shares in an S&P Index Fund. That will give you exposure to about 80% of US business revenues and their eventual profits and losses.

The Nasdaq Index* – (OTC-C on the Chart below)

The Nasdaq is another index of larger company stocks, about 2000 of them. It’s a more ‘recent’ index as it was founded in 1971. It is heavily weighted towards information and technology companies which (way back in 1971) were considered too small or too unprofitable to be included for listing on the older and larger exchanges. In its own application of the Pareto Principle, the Nasdaq 100 is a subset of the Nasdaq Index that focuses on only the top 100 Nasdaq listed stocks — but that small group, on a given day, may actually account for over 90% of the full Nasdaq’s movements. No wonder then that, for some investors, the Nasdaq 100 is the favorite representation of ‘the market’.

The Russell 3000 Index* – (RUA-X on the Chart below)

The Frank Russell Company created this index in 1984 in an attempt to include more securities in an index. This index represents more than 98% of the investable stocks in the US Market. It’s a benchmark that includes many smaller ‘up and coming’ companies. Many portfolio managers (including yours truly), mutual fund managers, and ETF’s are based on or benchmarked against the Russell 3000 Index.

Every portfolio management company has their own theory on which index (or whether one should use an index) makes a useful benchmark. Our company belief is that one should look for the strongest sectors and then determine the strongest companies within those strongest sectors (such as healthcare, technology, utilities, etc.) and then hold the strong ones and ignore the weak ones. Simple, right? We continue to see that this approach yields much better results than holding a representation of an entire index. It’s more work, but you’re worth it.

So, here’s the chart for this year for these 4 major indexes. (Source: FastTrack software)

DJ-30 is Dow Index in Red, up 6.5% for this year so far.

SP-CP is the S&P 500 Index in Green, up 15.6% for this year so far.

OTC-C is the Nasdaq Index in Pink, up 43.7% for this year so far.

RUA-X is the Russell 3000 Index in Grey, up 18.4% for this year so far.

There are scores more indexes out there, some for mid-cap U.S. companies, others are variations on the above themes, and many delve down deeper into the sector or industry levels. I always advise clients and readers to notice the various benchmarks but to judge their own portfolio by a far more important measure: “Is your portfolio meeting your goals?”

We believe that our personal benchmark should be “Am I closer to reaching my goals than I was x years ago,” not “Did I beat the Dow today?”

Ron’s Market Minute – What a Year!

 Have you ever seen a year that saw a 30+% drop in GDP in a single quarter? Or a quarter that came in at a 34% growth? Me neither, until 2020.

 This year created an extreme assortment of levels of performance across the entire gamut of financial advisors, hedge funds, individual investors, young entrepreneurs, self-directed investors and family office agencies. Some of the smartest lost almost uncountable amounts of money. Some other smart ones made a pile for themselves and for their clients. A lot of money was made too out of pure dumb luck. To those we say ‘Good for you’, but we also say hope is not a strategy.

 Those that protected capital might not have done as well if they didn’t get back in early. Those that rode the whole thing out look like heroes, as civic, state and federal governments threw money at the pandemic response hand over fist… WORLDWIDE! The amount of debt incurred at a government level was phenomenal, as those current government officials recognize that the current politicians will never be around to have to suffer through the payment cycle. Here we sit at the back side of the single biggest liquidity flood in world history. Not only was it big, it was huge-a-mungous! By the close of March, everyone was a Keynesian.

 People who patted themselves on the back for staying invested through it all are more than lucky it never rolled over again, as the other people who used historical models of defense tried to protect capital. If the vaccines had turned out with bad efficacy levels, it would have been a dramatically different fourth quarter. The good news is it worked out. At the end of March, it was a train wreck, and the best performing parts of the market were defensives. Growth gurus were beginning to ignore phone and emails.

 But it was the ability to flex with the global government responses that ultimately worked out. If you had some capital preserved, the start of Q2 was a wonderful place to get long.

For those that manage money professionally, it was extremely difficult to be as flexible as the wild gyrations of the 2020 market situation demanded. Every quarter was different. For individual investors, it was about managing the preservation of capital while trying not to miss the move. If you have nothing left in retirement, it hardly makes sense to put it into the wildest, most expensive stocks one quarter, then the most beaten-down names the next. Mixed signals were running rampant. Bear markets don’t have higher highs and yet the charts DID. While they were right (the higher highs) in the Q2 they were getting harder to believe. But then Q3 and Q4 crushed all knowledge of historical patterns. Even now, as Q4 reaches its end, the performance is beyond impressive. We are humbled that our clients have continued to put their faith and trust in us and we are grateful that our strategies have brought rewards.

It is an important year to be humble. It was a year where people lost fortunes and made fortunes. A year where some sold at the February highs and never got back in, or sold at the lows and never got back in. There were those that rode through the fastest 35% market crash in world history and wiped out their account using strategies that had worked for years. Commodity investors blew up all around the world as historical statistics were wiped out. It was an important year to remember that, at any time, almost every investor had the mental fatigue of dealing with a terribly performing account at some point within the year.

All of us will remember 2020. It was a year whose very name promised insight, but instead blind-sided us. Together we have been through record downside moves, upside moves, commodities trading below zero, the fastest vaccine discovery ever, a frighteningly large death count and the largest government spend EVER!

Best wishes for 2021! (At its worst, it won’t come close to 2020)

 

 Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com

LFS-3385666-122920

This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners for use with advisory clients only and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email please contact us at 602-252-8700 or by e-mail at lindaw@denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation. Information in this commentary is the sole opinion of Denk Strategic Wealth Partners. Past performance is no guarantee of future returns. All market related investments involve various types of risk, which include but are not restricted to, credit risk, interest rate risk, volatility, going concern risk, and market risk.

The Update provides information of a general nature regarding legislative or other developments. None of the information contained herein is intended as legal advice or opinions relative to specific matters, facts, situations or issues. Additional facts, information or future developments may affect the subjects addressed in this document. You should consult with an attorney, accountant or DSWP planner about your particular circumstances before acting on any of this information because it may not be applicable to your situation.

Lincoln Financial Securities and Denk Strategic Wealth Partners and their representatives do not offer tax advice. Please see your tax professional regarding your individual needs.

*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.

Ron Denk is a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Mr. Denk is also an Advisory Representative offering services through Denk Strategic Wealth Partners, a Registered Investment Advisor. Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation.

Please see Denk Strategic Wealth Partners’ Client Relationship Summary here http://denkinvest.com/?page_id=7099 for succinct information about the relationships and services DSWP offers to retail investors, related fees and costs, specified conflicts of interest, standards of conduct, and disciplinary history, among other matters.

LFS’ Regulation Best Interest Disclosure Document, which describes LFS’ broker-dealer services, and other client disclosure documents can be found here <https://www.lfg.com/public/lincolnfinancialsecurities/clientinformation/overview/disclosure>.

Past performance is not a guarantee of future returns.