Don't Let the Market Correction Derail Your Retirement Plans—Diversify, Here's Why....
When we meet with a new prospective client, we usually see either (or both) of the following scenarios: First, they own an annuity and have questions about if it is the right investment for them; and/or second, they have little, if any, real diversification in their portfolio.
The annuity dilemma is easy to solve. Once we show them the details of what the annuity really is (e.g., costs, performance, etc.), they usually agree that there are superior alternatives for their long-term plan, recognizing that, in most cases, the annuity is just a high-fee drag on their objective of growing their net worth.
However, the lack of portfolio diversification is a more difficult conversation. Why? Well, the answer may be obvious: For the last several years, the U.S. large-cap growth space (i.e., the S&P 500) has been the clear outperformer over any other asset class; and, arguably, it’s not even close. So, when you couple that data with the fact that most investors dislike buying into “underperforming” asset classes (however backward looking that may be!), it is not surprising that many portfolios are now heavily concentrated in the S&P 500.
But thus far in 2025, this large cap growth category is actually “underperforming”, so perhaps this is a good time for investors to take a step back and re-assess their own personal investment strategies.
Let’s look at some longer-term numbers to at least challenge today’s current thinking that all one needs to invest in is the S&P 500. As an example, from 1985-2024 a 100% globally diversified stock allocation returned 11.6% per year while the U.S. Total Market Index (again, think S&P 500-like) returned the same. And somewhat surprisingly, the volatility of both portfolios was also similar.
So, then what’s the point of diversification, right? If the return is the same why bother with this globally diversified mix when you can just buy an S&P index fund and “set it and forget it”?
But 40 years is a very long time. And if we take a closer look, some questions about investor behavior arise. For instance, how long would you be willing to hold on to an investment in an asset class that is underperforming – be honest!! For some, just one year of underperformance might be hard to stand! But what about 3 years of losses in a position? What about 5 years? Suffice it to say, very few investors may have the stomach to stay with an investment for 5 years of losses. And this is exactly where owning a U.S.-only portfolio potentially fails. Here is why.
Consider these stats: If you had invested in only the U.S. stock index at any point over the last 40 years, you would have had a negative return:
- 4 times over a five-year period (e.g., 2000-2005)
- 1 time over a seven-year period
- 1 time over an eight-year period
- 2 times over a ten-year period
To summarize, eight times over the past 40 years (20% of the time), had you invested in solely U.S. equities, your portfolio would have had nothing to show for it five to ten years down the line. And, in practice, it is hard to imagine anyone sticking with this strategy through any of these multi-year rough patches as they wait for a rebound.
But now let’s consider what happened with the globally diversified stock portfolio during the same time periods. How many times during the same 5 to 10-year periods was it negative? ZERO. Again….ZERO.
So, although it is true that the long-term returns of both portfolios (over 40 years) were the same, the diversified portfolio was MORE CONSISTENT. And this is very important; lower volatility year to year in the portfolio makes it MUCH easier for investors to stick with their strategy over time and thus dramatically increases their odds of successful investing!
With that all said, let’s say you still don’t want to invest in international stocks for whatever reason. So, we’ll just look at better diversifying within a pure U.S. stock allocation only. First, all investors need to define what exactly is their financial goal? Many will say “to beat the market”--especially when the markets are strong. Unfortunately, this goal often changes when markets are weak; instead, the goal quickly becomes “not losing money”!
However, we would argue that both of these are inaccurate, and neither should be the stated objectives for most investors. Earning a return that is sufficient to reach and maintain financial independence for your own situation. Now that is a true financial goal.
So, for this example we will use the same U.S. market index we previously referred to and a simple U.S.-only but “multi-asset class” portfolio comprised of these 3 asset classes: large growth, large value, and small value.
If we look back at all rolling 10-year periods since 1964 how often was the U.S. market index negative? 3% of the time. How often was the multi-asset class portfolio negative? NEVER.
How did the multi-asset class do in those periods the overall market index was negative? It averaged a gain of 4.5% per year. Again, more balance and consistency!
And what about using the “4% rule” for withdrawal rate in retirement…How often did the U.S. market index return less than 4% a year? 13% of the time. The multi-asset class portfolio? Only 1% of the time.
To summarize, when we compare historical data, there is a greater probability that the U.S. market index will be negative than the multi-asset class index returning less than 4% per year!
And what is the risk of investing in a more diversified mix compared to the U.S. market index? You risk “underperforming” in strong periods for the S&P 500 (such as what we have seen over the last few years). BUT you increase the odds of a positive return--or a “sufficient” return--to reach your goals.
Which is the more appropriate goal to meet: Beating the S&P 500 in a year or achieving long-term financial independence?
In closing, if you are in retirement or within 10 years of retirement, is your strategy prepared for a period of weak returns from the U.S. market? Or has recency bias led you to think that owning a high number of large cap tech stocks, like the Mag 7, is a diversified portfolio? Maybe the S&P 500 will be the leading asset class forever. Or perhaps (more likely) it will underperform for several years at some point. Our guess is too many portfolios are not prepared for such a scenario. You may survive a bad decade when in saving mode, but in retirement a negative or sub-par long-term return is awfully difficult to overcome.
Disclosures: This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of NCM Capital Management, LLC and are subject to change at any time based on market and other conditions and NCM does not undertake to update or supplement its newsletter or any of the information contained therein. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable. There is no guarantee that the investment strategies discussed above will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Investment advisory services are offered through NCM Capital Management, LLC, an SEC-registered wealth advisory firm domiciled in New Jersey. This communication is not to be construed or interpreted as a solicitation or offer to sell investment advisory services. For additional information about NCM Capital Management, LLC, you may request a copy of our disclosure statement as set forth on Form ADV. Readers are encouraged to consult with their own professional advisers, including investment advisers and tax/legal advisors. NCM Capital Management, LLC does not provide legal or tax advice. NCM Capital Management, LLC can assist in determining a suitable investing approach for individuals, which may or may not resemble the strategies outlined herein.