Passive Investing Might be Exposing You to More Risk in 2023
To the casual observer, 2023 might seem like a great year for U.S. stocks, with the S&P 500 (the 500 largest stocks) up more than +13% year-to-date. However, looking into detail, almost all of the returns have been driven by the top 8 stocks in that index, while the remaining 492 stocks had flat returns this year.
This narrow leadership highlights the problems with passive investing, where your portfolio holds more and more of the biggest companies. The risk here is the recent melt-up in valuations for the biggest stocks have high expectations embedded in them. Should results fail to match up to expectations, these stocks can experience large drawdowns during a sell-off — think back to the dot-com crisis at the turn of the millennium.
We looked at and written about what happens when companies become part of the largest stocks in the index as well as what happens when companies trade at high valuations. Both pieces of research are extremely relevant to where we find ourselves today.
We believe that investors need not be subject to excessive risks when investing and there are clear opportunities in today’s markets if you were to look at a larger opportunity set by diversifying internationally as well as focus on parts of the markets where stocks have higher expected returns going into the future.
In the same way that most of us would rather trust an accomplished physician to manage our health, after all, physicians have specialised training, real-world experience and access to tools outside the reach of the general public. Most importantly, they took an oath to prioritize the patient’s health over their own interests.
GYC adapts insights from financial science to each client’s individual situation. We look at clients’ financial health holistically and work with them to create a plan that aims to accomplish their unique goals. We are a trusted partner who can help when times are tough.
If you would like to know how you can invest with a peace of mind and increase your probability of success, click here to schedule an exploratory chat with us. (Complimentary 30-minute session).