Market Breadth

As certain stocks hit all-time highs, it’s important to recognize that a diversified portfolio tends not to invest just in high volatility names. While it would be great to be concentrated in high-risk names that are rising, these high-risk names can just as well reverse course and provide punishing losses. 

I’m sure many of you remember the year 2000 when certain assets were guaranteed to increase astronomically only to lead to devastating losses for investors. We want to avoid that obviously.
 
A non-correlated portfolio is designed so that the overall asset base provides the right mix of positions to maximize return while minimizing risk as much as possible. 

In times where a small subset of positions are breaking higher, sticking to the allocation strategy can be a challenge. But I have found in the last 35 years that is a challenging exercise worth pursuing. 

Pouring all assets into a few positions might seem like a good idea. For example, in the S&P 500 a significant percentage of the returns come from a fairly limited group of stocks. In Q1 2024, the top 10 stocks in the index accounted for 90% of the gains. Simply incredible. But this means if these positions were to move in the opposite direction, the losses could be significant.

A recent article highlighted this issue. Excerpts are provided below.

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Begin quote 

“A handful of large names in the S&P 500 accounted for most of the benchmark’s gains during the first quarter.

The top 10 contributors were responsible for 90% of the S&P 500’s gains in Q1, with the triumvirate of Apple, Microsoft, and Nvidia contributing over 50%, according to S&P Dow Jones Indices. U.S. large caps had their strongest start to the year since 2019, and the second-strongest first quarter in the past decade.

Notably, the large caps that outperformed during Q1 were among the biggest laggards in 2022, causing many investors to look to equal weight ETFs, which prohibit a small number of names from having an outsized impact on the index.

After outperforming significantly in 2022, the S&P 500 Equal Weight Index began lagging behind its cap-weight parent index in February. Equal weight still maintains its trailing 12-month lead by 142 basis points.

During the last month of the quarter, the S&P 500 climbed 3.7% while equal weight – tracked by the Invesco S&P 500® Equal Weight ETF (RSP) – slipped 0.9%. During the full quarter, the benchmark gained 7.5% and equal weight was up 2.9%.

Both equal weight and the S&P 500 slipped in February, declining 3.3% and 2.4%, respectively. In January, the equal weight gained 7.4%, outperforming the S&P 500, which gained 6.3% during the month, its best January performance since 2019.”

End quote 

Source: 
https://www.nasdaq.com/articles/top-10-names-in-sp-500-responsible-for-90-of-q1-gains

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We have no intention of avoiding areas of the market that are high growth opportunities. But...... we will do so in a measured way. Certain trends, (such as artificial intelligence) are captured inside of a company that is not solely focused on artificial intelligence. This is a more conservative way to capture the opportunity presented by new trends.

I thought some perspective might be helpful. If you have any questions, please let me know.

Disclosures: DWM currently holds Apple Inc. (AAPL), Amazon.com, Inc. (AMZN), and Microsoft Corp (MSFT) in DWM managed portfolio strategies.