Q: Am I losing if I don’t beat the market?
A: Beating the market is often the stated goal of investors, money managers and even hedge-fund managers. But sometimes victory in investing does beyond just topping the Standard & Poor’s 500.
Generating returns that exceed the market, usually measured by the S&P 500, is how professional stock pickers justify their existence. But while stock pickers are and should be measured against the market, that doesn’t mean your portfolio or even your financial advisor should be based on your entire portfolio’s performance. Remember there are few investors who should be 100% invested in U.S. Stocks. Nearly all investors are prudent to not only add foreign stocks, but to add bond holdings. Adding bonds to a diversified portfolio may lower your returns – and cause your portfolio’s returns to lag U.S. Stocks and the S&P 500 – but is will also reduce your risk. The IFA Index Portfolio 50, which is half stocks and half bonds, has generated an average annual gain of 8.3% since 1928, which lags the market’s 9.6% annual gain. But that’s OK, since it is also 40% less risky.
Some investors might even have the need for even less risk, which would cause they to lag the market even more. They key is are you getting adequate return for the risk you are taking, not simply if you’re beating the market.
USA TODAY markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at [email protected] or on Twitter @mattkrantz.