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Diversification Matters. Stocks Matter.

Diversification & Stocks Matter

Everyone knows that markets have been in the dumps this year.

But did you know if you look back at the trailing 12-months from the end of November (11/30/22), the Dow was actually up 0.31%?

While we always seem to focus on the calendar year as a start/stop date when evaluating performance, it’s somewhat irrelevant to an investor who’s looking to grow their wealth.

But before I dive in deeper, I have two housekeeping notes:

#1 – We’re on Instagram. I’ve been writing less frequently because we have been publishing more digital content on Instagram and our Podcast channel (more on that in #2).

If you are on Instagram, be sure to follow us. We’ve been posting quick and timely videos (or “reels” as they’re called). We will include links to our Instagram videos in our blog updates but, to see them in real time, be sure to follow @monumentwealth on Instagram and hit the “bell” icon (see below) to get alerted when new content is posted. Instagram is fast and easy for us to post quick and informative video updates. Plus, everyone likes watching the dogs in action and seeing the more personal side of our team members. Be there or be square!

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#2 – Our Podcast has taken off.  I have always loved podcasts, but I never anticipated how popular the medium would become for Monument. The feedback we get is that our OFF THE WALL Podcast is interesting in a way our blog is not – it’s conversational and provides not only an opportunity for us to have guests but to also allow listeners to ‘sit in’ on conversations we have as a Team.  As a Team, we are talking about the markets and building wealth all the time, so we decided to simply start recording those conversations and sharing them.

We are currently aiming to do one asset management/market overview topic with Erin, Nate and myself once a quarter, but we can also record and quickly publish one if there is a timely topic to discuss. They are fun, easy and, for some, more entertaining than the blog. Bottom line is, we are really focusing on delivering you the best content experience in 2023.  Be sure to see the Podcast page and use the links to subscribe to one of the popular podcast players – Apple, Google, Spotify, we’re there.

Ok, so back to the markets….

As of 11/30/22, the Dow was down -4.81% YTD. Now compare that to the Nasdaq, down -26.70% YTD. If the year ended on 11/30/22, this would have been the SECOND largest positive spread of the Dow to the Nasdaq since 1973 (the year the Nasdaq started publishing data).

That’s a big difference…about a 22% spread. And that’s just price returns which doesn’t account for adding in dividends.

The largest positive spread took place in…drumroll…2000.

How about the opposite?

The two largest years of outperformance for the Nasdaq over the Dow came in 2020 and 1999, where the Nasdaq outperformed by 36% and 63% respectively.

Ok, so here’s the “So what?!” part…

Consider this…

Meta: 52 week high $352.71, currently $122, needs to increase 187% to get back to the high

Google: 52 week high $152, currently $101 and needs to increase 51% to get back to the high

Apple: 52 week high $183, currently $147 and needs to increase 25% to get back to the high

Amazon: 52 week high $177, currently $92 and needs to increase 94% to get back to the high

Netflix: 52 week high $632, currently $318 and needs to increase 99% to get back to the high

With that in mind, two things matter: Diversification & Stocks

First, diversification matters.  A good portfolio has several pistons in the engine and together, they go up and down to make the car go forward.  Right now, investors who overconcentrated in big popular tech names are hurting way more than investors who for example, hold a portfolio of dividend paying stocks. That pendulum will swing back and forth but sometimes the best time to make a comment about diversification is when that pendulum swing is at its apex.

Second, stocks matter. Just as I saw in 1999-2000, a lot of individual investors start catching FOMO (fear of missing out) and start buying or over concentrating in the highflyers.  I get it, it’s not easy to watch stocks you don’t own keep going up and it’s even harder to part ways with them when they keep going up.  Like diversification, that pendulum will swing back and forth but sometimes the best time to make the comment about overconcentration (and frankly overconfidence) is when that pendulum swing is at an apex.

Point – it’s easy to get overconcentrated when stocks are going up 1) overtly by falling in love with them and loading up or 2) covertly through normal growth within a diversified portfolio.

Have a solid, unemotional plan and process to deal with that.

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David B. Armstrong, CFA

President & Co-Founder

Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....

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