This monthly letter is very special to us and has always been reserved for clients and will be snail-mailed before we post it on our website. Unlike other forms of communication, we engage in throughout the month, like social media posts and blogs, I always write this letter directly to you all - our clients. I let the topic of this letter marinate for weeks. I think about it when driving, walking to get a cup of coffee, or daydreaming. It is a special ritual for me and I hope you enjoy it as much as I do.
This month our focus will be on exploring the idea of balance in all aspects of our lives. The word balance comes up in so many ways with regard to investing and portfolio management. Even the term “balanced portfolio” has become commonplace in our industry, but I wonder how many people really know what it means.
Pop Quiz: Do you know what we are trying to balance in a balanced portfolio?
As an investment manager, my role is to balance income (dividends and interest) and the potential growth of a portfolio. Another way of saying that is I am tasked with balancing a current, certain income with future (hopefully) larger growth. A bird in the hand vs one in the bush.
In other words, we must balance risk.
We must also balance our holdings so that no single holding can topple our portfolio. What may come as a surprise to many investors is the S&P 500 is NOT a balanced portfolio.
Here are some facts to illustrate this point:
· There are currently 504 stocks that make up the S&P 500.
· The S&P 500 is a market cap weighted index. This means the bigger the company, the more impact the stock prices have on the index returns.
· "Eight of the largest tech and growth companies in the U.S., Alphabet, Amazon, Apple, Meta, Microsoft, Netflix, Tesla and Nvidia, now account for 30% of the S&P500’s market capitalization. That is up from about 22% at the start of the year.” - WSJ1
· If these were eliminated, the S&P 500 would be negative YTD.
· If these were completely balanced via equal weighting: “Compared with the traditional index’s 11% gain, the equally weighted version has added 1.1%. That is the largest-ever outperformance by the S&P 500 on a year-to-date basis, according to a Dow Jones Market Data analysis through June 5, based on data starting in 1990” - WSJ1
· Just three holdings (NVDA, AAPL, & MSFT) have contributed 11% of the 12.30 YTD return.
This phenomenon of a handful of companies being responsible for a large percentage of the YTD returns is fairly recent development but it continues to call into question the validity of standard benchmarks. In the spirit of our monthly theme, it is important to consider benchmark returns and balance them out with other data, such as rolling three-, five- and 10-year returns of a portfolio, benchmarks that equally weight stocks, and most importantly, your personal goals.
Yes, you are the benchmark! You are the one that matters.
When you know…
1. What you need to spend,
2. How much is your “enough”,
3. And what type of returns you need from your portfolio to live the life you want,
Then that is the benchmark for you.
We can hone in on that number, find the balance we need to make that happen, and allow the rest to go.
I am wishing you a restful and cool summer. Please don’t hesitate to reach out to discuss the idea of balance, benchmarks, or whatever.
Brandon Hatton on behalf of HATTON INVESTMENTS
President, Chief Investment Officer