Growth stocks have outperformed so far this year, and value stocks have lagged far behind. Of course, seasoned investors know that those trends can suddenly reverse (remember what happened to investors over-exposed to tech in 1999, or to investors who over-indulged in financial stocks in 2008?).
A prudent investor with a well diversified portfolio maintains exposure to both strategies to even out the ride.
“When one third of the S&P 500’s gain comes from four stocks, there aren’t many ways to beat the market without them,” says Lahart. And while some portfolios can make room for pricey growth stocks like Amazon and Facebook, other investors prefer to focus on stocks with more modest valuations and higher income streams.
What’s important is building a portfolio that helps you reach your life goals, rather than obsessing with the notion of “beating the S&P 500.” Trying to beat the market can be a dangerous game when market gains come from a relatively narrow band of stocks.
We are all gratified by the bull market’s continued run, but need to remind ourselves that all good things come to an end. Just like a game of “Musical Chairs,” we want to make sure we still have a seat when the music stops.
“When the stock market is driven by just a handful of stocks, each of which is substantially more expensive on a price-earnings basis than they were at the start of the year, it can be setting itself up for trouble,” cautions Lahart.