If some of your stock funds seem like they are lagging this year, then it could be explained by something called beta. This means that some stocks or groups of stocks tend to be more volatile than others. For instance, the Dow Jones Industrial Average (The Dow) was down only 8.7% in 2022, while the Nasdaq was down a whopping 33.4%. But now in 2023, the Dow at the end of June was up 3.8%, while the Nasdaq was back up over 31%. The Nasdaq has a much higher beta. It tends to move further and faster in both directions.
This is important to understand. Why? Because it can help explain your returns. You may own low beta funds because you are a low risk investor. Low beta funds typically offer lower volatility with lower long-term returns, but they can do a better job of protecting your principal during the down years (like last year). High beta funds offer higher volatility and potentially higher long-term returns. A low risk investor with too much money in a high beta fund is going to be at risk of wanting to sell when things go down. This is not good. It spoils the dish. Here at Wealth Management we spend a great deal of time trying to match our client’s portfolio beta to their personal risk tolerance. It’s not a perfect science, but it certainly does help.
So if you are lagging some this year, it might be because your funds are lower beta, and they probably held up better last year. Give your investments time to do what they are designed to do. Sometimes one group will shoot past another for a period of time, but eventually the other may catch up. Patience is virtue in this business.
See the chart below comparing the two indexes. The Dow is in blue, the Nasdaq is in orange. See how the Nasdaq went higher at the highs and lower at the lows. Simply put…..it tends to be more volatile. If you would like to revisit the beta of your own portfolio, then give us a shout and we would be happy to discuss.
Best Reagrds,
Mike
Below see Chart of Dow Jones Industrial Average compared to Nasdaq from July 2020 - July 2023