Not quite midway through the year and we’re seeing a large disparity between the aggressive Growth portfolio and the Moderate Income portfolio. According to Morningstar’s software (graph below), the returns on our target portfolios for the last 12 months were 15.96% for Growth and 5.12% for Moderate Income (actual returns will vary). We thought it would be interesting to discuss the reasons why this is the case.
Reason #1 – FAANG
“FAANG” refers to a group of stocks (Facebook, Apple, Amazon, Netflix and Google) that have accounted for over one third of the return of the stock market this year, based on a report from CNBC this morning. The growth portfolio has 2 of the 5, which is in part why it’s doing so well. The other three FAANG stocks appear to be too overvalued to buy. The Moderate Income portfolio has none.
Reason #2 – Rates
Even though they haven’t materialized yet, interest rates have threatened to go higher. This hurts the typically less risky, but debt-heavy utility, telecom, and real estate companies that make up a large portion of the Moderate Income portfolio. The Growth portfolio has very few of these essential services companies.
Reason #3 – Risk
The risk (or volatility) in the Growth portfolio is double what the Moderate Income portfolio has had the last 12 months. This is by design. More aggressive investors have been encouraged to invest in growth, while most of our more conservative, retired clients prefer less volatility and more consistent income (from dividends and interest).
If you’re in the Moderate Income portfolio and you’re feeling like you’d rather be in the Growth, we encourage you to wait until the market pulls back to make that change.
Just last week we saw trouble piling up for the current administration and when the word “impeachment” was mentioned, the stock market sold off 1.8% in one day; the worst day of the year so far. On that same day the Moderate Income portfolio lost only 0.25%, one-seventh of that, proving the reason most are invested in it. If trouble continues to brew in D.C., then portfolios like the Moderate Income will become the darling again of investors.
If you have any questions about your current portfolio please don’t hesitate to contact us.
-Tim Porter, CFP®