Investing for the Long Term

It appears investors are increasing their caution in buying stocks since the major indices peaked for the year high on July 31. Today's decline of the S&P 500 puts the index just 0.1% above its 200 Day Moving Average (DMA), a typical pivot point for investors. Now that the S&P 500 is down 8% from its July 31 peak, investors will either consider stocks are near buying opportunities, or there is more weakness in the market. It will not be hard to interpret their perspectives as, typically, the 200 DMA is when investors begin changing recent ambivalent investment strategies to a conviction of buying or selling.

The media's interpretation is that investors are getting more cautious and will increase their selling due to concerns about consumer spending, holiday retail sales, and the risks of a slowing economy.  

What I don't hear is that the S&P 500 is up 11.14% YTD, including today's decline. That is still a terrific return if the year were to end tomorrow. In fact, this year's return is above the index's historical average returns of 10.50% for the past 100 years and 10.75% for the past 50 years, according to Tradesthatswing.com.  

Most importantly, during the past decades of reasonable annualized returns by the S&P 500, the US has experienced recessions, the Great Recession, housing and Dot Com busts, and terror attacks.

NASDAQ and technology stocks have been the darlings of the market for the past several years, with standouts that have included Apple (APPL), Facebook (FB), Google (GOOG), and this year, Nvidia (NVDA). However, the exciting years of fantastic returns in technology came at a great price to investors. They needed to hold on tight as NASDAQ plummeted over 30% many times this century and most recently dropped 32% in 2022.

Despite years of huge gains by NASDAQ, the index has underperformed longer-term returns of the S&P500 with greater volatility. The annualized return of the NASDAQ since its inception in 1985 is 10.76% and nearly 50% below its 15-year annualized return reached by 2000.

The chart below of annualized price returns illustrates the smoother, consistent returns of the S&P 500 with 7.75% annualized price gains versus the wild and crazy world of technology that has averaged a superior 10.76% annualized price gain.

Ultimately, the goal is building wealth with steady account value increases. This is achieved by investing in markets that have the highest probability of annual gains. To pursue higher gains, one will, in most cases, be adding risk and volatility.

What Does It Mean To Me?

The key to portfolio allocation is to strike a balance of growth and income to match one's investment goals and temperance. If volatility and account swings keep you up at night, then the allocation would include a greater percentage of income securities and stocks of the largest stable companies. On the other hand, if volatility does not send you on an emotional roller coaster, then one would add allocations to companies with higher growth potential, which would include technology companies. This latter allocation has more risk and volatility but has also rewarded many investors with superior returns.

More importantly, it is to recognize that the US stock market has provided investors decades of account appreciation even after experiencing losses from recessions or worse. The US economy has always recovered along with the stock market.

For the past several years, we have included allocations into the technology sector for the growth portion of our models with mutual funds, Exchange Traded Funds (ETF), and stocks that include AAPL, FB, GOOG, and NVDA. The key is to keep the allocations to specific sectors low enough not to jeopardize the portfolio's overall performance but enough to provide some additional return. For example, this year, NVDA has increased over 100% since being added to the Up Capital portfolios but started only as a 4% allocation, which has increased to 8% due to appreciation.

Let us know if you have any questions about this Weekly Brief or your own financial and investment planning. We welcome the opportunity to be of service to you and your family.