Maybe you’ve heard us say, “the recovery is lopsided.” For the most part, many investors don’t care. They see the S&P 500 Index has generally recovered since the bottom on March 23, 2020. What they don’t see is that the bulk of the S&P’s performance has been generated by five stocks. Apple, Inc., Microsoft Corp., Amazon.com, Inc., Facebook, Inc., and Alphabet, Inc., which are up 32.37% as of Sept. 17, 2020. The rest of the benchmark index has a year-to-date return of -3.30% on average.
For those who are invested in these growth stocks, the market is sunshine and happy days—even with the election volatility beginning to creep in. For investors who are conservatively invested in dividend-paying stocks, well, they could be looking at a year-to-date loss of more than 17%, as measured by the Dow Jones Dividend Index.
Now, we never advocate a concentrated portfolio of strictly growth stocks, dividend-paying stocks, or the top five performing stocks. We believe in diversity among sectors, capitalization, growth, value, etc. Diversification aims to lower the overall volatility of your portfolio. Unfortunately, in a market as we have now, it can also lower your overall short-term performance, compared to a benchmark index.
We believe performance should be measured long-term. You aren’t invested for just the last six months. You are invested for 10 years or more. Fluctuations like the 34% loss in March 2020 or 2019’s 30% gain tend to average out over time. The market has a long-term average of around 10% a year.
So, while it is tempting to sell your weak performing dividend-paying stocks for the high-flyers of Apple and Amazon, now is not the time to change course. If your investment strategy has performed well in the past, it will likely perform well again in the future.
Growth stocks are companies that have achieved or have the potential to achieve higher-than-average gains. They are attractive for investors who have a long time horizon and do not need income from their portfolio. Investors hold these stocks in hopes of selling them at a higher price in the future. Value stocks are companies that have fallen out of favor but still have good fundamentals. They often pay dividends and generally don’t experience as much volatility as the broad market. Most investors can benefit from a blend of the two types.
What investors shouldn’t do is abandon a currently out-of-favor strategy for whatever is working right now—regardless of what type of stocks are in favor. Today, if you chose to sell your underperforming dividend stocks for well-performing growth stocks, you would be buying high and selling low, negating the first lesson of investing. Furthermore, growth stocks are overvalued, meaning they are selling for more than they are worth. The S&P Growth index has a historical price-to-earnings ratio of 20.69. Today’s P/E for the index is 34.18, so for every $1 in earnings, you are paying more than $34 in stock price when normally, you’d pay around $20. You are paying a premium for their rapidly appreciating price.
In contrast, the Dow Dividend Index has a historical P/E of 15.27, while its current P/E is 12.58. Investors are getting more for their money. Of course, that is not to say investors should dump their well-performing growth stocks for undervalued dividend-paying stocks either. Take a good look at your long-term performance and what your goals are for your portfolio. You may need to rebalance your portfolio, trimming positions that have grown too large or by directing new funds into underweighted positions. If you need the income provided by dividend stocks, or if you have a long time horizon and can better weather the volatility of your high-growth stocks, you are likely where you need to be. Your adviser should strive to balance volatility, risk, and performance to suit your situation.
If you have questions regarding the diversification of growth and value in your portfolio, the experts at Henssler Financial will be glad to help: