The trend continues with the U.S. stock market (as defined by the Standard & Poor’s 500 Index and Dow Jones Industrial Average) being up 15 months in a row. You may recall we stated last month that calendar year 2017 was the first full calendar year when the S&P 500 and DJIA went up every month. But the trend is actually longer, starting in November 2016 and stretching for 15 months now. This is certainly nice, but recognize it is unprecedented and not normal. We’ll take it while we can, but volatility is a fact of life for stock market investors. So as the old Boy Scout motto goes: “Be prepared.”
We are prepared for stock market volatility in your portfolio by being broadly diversified, including owning low-volatility stock funds and bond funds. We haven’t had many down periods, but Tuesday, January 30, did provide the first one-day period in a long time with an over 1% daily loss. Here is how two of our low-volatility stock funds did:
Vanguard 500 Index Fund -1.08% Gateway Fund -0.33%
Gateway Fund was about one-third as volatile, which is consistent with its longer-term record.
Vanguard Total World Stock Fund -1.03% Vanguard Global Minimum Volatility Fund -0.47%
So both worked as expected. Not that one day makes a down market, but it has been a while since we had a 1%-plus drop in one day to test these funds.
On the upside, in 2017 the top 10 performing stocks in the S&P 500 were up from 85% to 143%, compared with the total index being up 21.83%. The top performers were Align Technology, up 142.95%, and NRG Energy, up 124.31%. Two household names were PayPal, up 91%, and Boeing, up 88%.
Don’t you wish you owned these stocks? You did! All of the top 10 are holdings in the Vanguard 500 Index and Vanguard Total Stock Market Funds. This is the reason we own broadly diversified stock index funds instead of traditional active funds or individual stocks.
Remember: It’s not what you own, but what you don’t own that may hurt you, and not owning the top performers makes it hard to earn a competitive return.
Another benefit of owning a broad index fund is that it will own the leaders of tomorrow as the economy changes and evolves. Today’s S&P 500 has Amazon, Facebook, and Alphabet (Google) in the top 10 holdings, companies we had barely heard of years ago. Gone from the top holdings are GM, IBM, and Sears.
We know a broad index fund will own the leaders of tomorrow as the economy changes, which is good for us!
As always, please contact us with any questions, news, or comments.