How do I Invest in Today's Market?
The market cap of 8 highly-priced growth stocks (META, Amazon, Netflix, Microsoft, Apple, Alphabet, Nvidia, and Tesla) is at a near-record of 27.7% of the S&P500. In comparison, their earnings only contributed 17.6% to the index, a 10.1% difference below their market-cap weight.
Every single one of these names are way above the average return of the stock market. However, we have written about how these fast growing stocks can continue to beat the market over the next one year but go on to underperform by large margins over the longer term. Why is this so?
A rapid growth of earnings is needed to justify current astronomical prices. Exceeding this extremely high rate of growth is further needed for stock prices to rise beyond current levels, a feat that is no easy task.
Despite growth stocks time in the sun, value stocks have been catching up since June. By definition, value stocks have low expectations embedded in their prices and do not need to have incredible acrobatic outperformance to drive price increases. At the moment, value stocks are near their cheapest versus growth stocks in history. While this is informative, we do not rely on it for allocation decisions. However, it does let us know about which areas of the market bear higher correction risks and where the margins of safety are greater.
By being systematically active, our portfolios are able to have exposure to different parts of the markets that gives us higher expected returns and capture all dimensions of returns, across sectors, industries, and geographies. For core portfolios, the bulk of the exposure now is to value stocks.
We don’t know if the growth stock train will continue rolling on, but we do know that an investment plan based on academically proven and tested asset allocation will ensure that your risks are balanced and your returns are broad.
We will advise you on how to construct a portfolio that is resilient and that is able to weather all market cycles.
In the same way that you would rely on a doctor to treat you or a professional mechanic to service your automobile, investors can benefit greatly by working with an adviser — giving you the peace of mind knowing that your plan is in the hands of a professional.
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