2019 Investment Returns With Our Recommendation

I have a friend who has been asking me for almost 3 years if we think the stock market is ready to take a dive. My answer is always the same: “What portion of your portfolio is actually invested in the stock market?” Why do I ask such a question? Because the return of the stock market only impacts her stock mutual fund investments. Her overall portfolio return depends on how all her investment types – cash, long-term income funds, stock funds, real estate funds, etc. – are mixed and how they perform together. This is called asset allocation and is an important investment portfolio technique that balances risk among various types of investments. So, here is: 1) A review of 2019 so far; 2) The stock and bond market returns in context and; 3) Our recommendation to focus on asset allocation, not the short-term direction of the stock market:

2019 Returns at Mid-Year

• Stocks: By almost any measure, the stock market has performed outrageously well so far this year. The S&P 500 Index, for instance, has produced a total return of 18.5%, according to J.P. Morgan. Furthermore, the Index has returned a total of 439.5% since the stock market low in March of 2009. Meaning, if you had $100,000 invested in the S&P 500 Index – although you can’t buy the Index you can try to approximate it’s holdings – it would be worth about $539,500 today. Not bad!
• Bonds: The U.S. aggregate bond market has returned 6.11%, according to J.P. Morgan. Prices have risen as yields dropped as, by definition, they move in opposite directions. A bond’s yield is the percentage of income produced by the bond. The yield of the aggregate bond market was 2.49% at the end of June.

What Happens Next

While I won’t predict the future of the market, one way to measure whether the stock market is over-priced or not is to look at the price of the S&P 500 Index compared to the earnings of the companies within it:

• J.P. Morgan’s analysis estimates earnings growth for the companies included in the S&P 500 over the next twelve months to be 7.2%. The 20-year average has been 11.7%.
• The price of the S&P 500 divided by companies’ earnings over the last 12 months is 17.4. This is known as the P/E ratio. The 20-year average is also 17.4.
• The P/E ratio looking forward over the next 12 months is 16.7. The 20-year average is also 16.7.

Based on these numbers, the S&P 500 Index does not appear to be over-priced at this time.

What about bonds?

• The average yield for bonds over the last 40+ years has been 6.61%. So, current bond yields of 2.49% are quite low compared to their historical average.
• The annualized total return of bonds, increase in price as well as yield, was 4.5% from 1999-2018. Total return of bonds in 2019 – 6.11% - has already surpassed that amount.

Asset Allocation is King…and Queen

Financial professionals disagree on much but almost universally agree that asset allocation goes a long way in determining your investment results. In other words, the selection of individual funds, while important, is secondary to the way that your assets are allocated among stocks, bonds, cash, real estate, etc.

A good financial plan helps determine how much in each asset category to hold for your specific situation. That mix is your secret sauce that will help manage your investing risk over time. It’s also why it’s so important to manage all of your investment accounts together and as a whole. That way, you can accurately measure your portfolio’s asset allocation and stay on target toward your own goals.

Where’s the market headed? None of us know for sure but the proper asset allocation will help us hit our goals amid the markets’ inevitable ebbs and flows.

Steve Byars, CFP®