When building the right portfolio for your goals, you know that it’s important to diversify or, in other words, not to put all your eggs in one basket.
However, that doesn’t mean a diversified portfolio always feels good. As a matter of fact, I’d say a diversified portfolio never really feels good.
For example, if you see the stock market rising, you may ask yourself, “Why isn’t my portfolio up as much?” And when the market goes down, you may be upset that you lost money. Even if your portfolio held up better than the market, it just doesn’t feel good.
At BlackRock, we call this S&P Envy.
Let’s look at how this played the last 20 years:
During the tech bubble in 2000 through 2002, the S&P 500 dropped about 40%. The diversified portfolio shown here lost money too, but less than half as much. Still, losses hurt – both your wallet and, more importantly, psychologically.
After the downturn, as expected, the market roared back, and the diversified portfolio rose too. But, like in the downturn, not by as much. This is where that “Envy” aspect really comes into play – the diversified portfolio didn’t “keep up”.
You can see this pattern in each bull and bear market. In each rising market, it feels like diversification’s working too well by dampening gains and, in each falling market, it feels like diversification’s not working well enough, allowing losses to creep in.
Yet these same characteristics that hurt on each rise and fall are what can help diversification win across market cycles.
In this example, even though it felt like the portfolio was always losing, it actually outperformed over the long-term. Remember: emotions are short-term feelings, but they can cause us to lose our long-term perspective.
