Growth in the markets so far this year has really been carried by extreme growth in just a few, but very large, companies as detailed in the below commentary from ASSETMARK, a vendor we have a relationship with.
After a strong stock market rebound in Q2 from its low point in Q1, the US stock market’s rebound continues to be driven by six stocks of five large-cap growth companies, popularly known as the FANAMA (Facebook, Apple, Netflix, Amazon, Microsoft, and two share classes of Alphabet (aka Google)). The stocks of these five large-cap growth companies enjoyed a YTD return of 43.3% while the stocks of the 495 other companies in the S&P 500 returned a mere 0.8% for the same period.
The temptation for some stock-based investors whose portfolios have not experienced significant growth this year, is to forget diversification and load up on these technology names. Those portfolios that are more dividend focused certainly haven’t experienced large increases in value since the beginning of the year. Sure, if you haven’t had much exposure to the incredible growth that has been occurring in technology, you probably should consider owning more, as there is no reason to believe that innovations in technology will stop disrupting the status quo in a lot of different industries. Just think what Uber and Lyft have done to the taxi cab market in just a few quick years. Other easy examples that come to mind are VRBO, PayPal, Amazon and most recently Zoom, which have all forever changed the landscape for doing business in their respective sectors.
However, beware of the temptation to forget diversification and specifically dividend investing. While the growth in the technology sector probably isn’t over, neither are these tried and true investment principals. Over larger periods of time, both diversification and dividends have been the cornerstones of wealth-building in stock portfolios. A perfect example of the power of dividends is the Investment Company of American mutual fund. What is special about this mutual fund is that it has been around for 86 years. With 86 years to work with, the fund makes quite the compelling argument for the benefits of compound interest, staying the course, diversification and dividends - all investment foundations.
Please take time to review the piece I’ve included on the Investment Company of America fund which details how a $10,000 investment in 1934 becomes worth more than $168 million at the end of 2018. Without the reinvestment of dividends that $168 million falls to just $14.5 million. The reinvestment of those dividends increased the value by over $153 million! By the way, the piece that details the Investment Company of America fund is really designed to detail the fact that elections come and go, but the markets charge forward regardless of partisan politics. You may find the political breakdown even more interesting than the incredible performance of the fund.
Now, I realize no one reading this email has 86 years to stay invested, but forgoing dividends to exclusively chase growth in technology, could turn out to be a costly mistake. After all, you probably aren’t reading this on your Blackberry phone and likely won’t be checking your Myspace account tonight; things do change and sometimes quickly.
As always, we hope you find the Weekly Market Review both interesting and informative.
Trevor N. Coe, CFP®