Understanding the S&P 500’s Recent Dominance

Why are so many people confident in the S&P 500? The answer is simple: it’s been on a tear. The last 10 years have seen exceptional growth, leading many to believe that diversification is no longer as crucial as it once was. This phenomenon is known as “recency bias,” where recent events heavily influence our perception of future outcomes.

But is this overconfidence justified? Before we jump to conclusions, let’s take a step back and examine the bigger picture. The MFS Asset Class Performance Chart offers valuable insights into how different asset classes have performed over the past 20 years. Take a look at the MFS Asset Class Performance Chart. This chart is a great way to visualize why diversification is so important.

If you look at the chart, you’ll notice something interesting. Large-cap growth stocks, which make up a significant portion of the S&P 500, have indeed been top performers in six of the last ten years. That’s an impressive run!

However, it’s not the whole story. What about international stocks? Over the past decade, they’ve generally underperformed compared to their US counterparts. But if you rewind another ten years, you’ll see a different picture. International stocks were actually hanging in the top three or four performers.

And what about other asset classes like commodities, bonds, and cash? For much of the recent period, yields on bonds and cash have been low. Commodities also had a rough stretch from 2011 to 2015. It’s this mix of performance that highlights the importance of a well-rounded approach.

The Importance of Diversification

So, even though the S&P 500 has been a star player, diversification still matters. Relying solely on one asset class can expose you to unnecessary risk. What happens if the market changes? A diversified portfolio can provide more stability and help you weather different market conditions.

Think of the “Diversified Portfolio” line on the MFS chart. While it may not always have the highest returns, it tends to be more consistent and resilient.

For example, imagine a client whose portfolio is underperforming in the S&P 500 due to its diversification. It might be tempting to chase those higher returns, but remember that a diversified portfolio is designed to balance risk and reward over the long term.

When Is It Time to Hire a Financial Planner?

This brings us to the main question: when should you consider bringing in a financial professional? Whether you’re looking for your first money manager or considering a change, understanding the value a financial pro brings to the table is essential.

Here are a few key reasons why you might want to consider professional financial guidance.

Reason #1: You Want Your Time Back

Time is a precious resource, especially for busy professionals like physicians. You’ve invested years in your career, and your time is valuable. Do you really want to spend hours researching investments, rebalancing your portfolio, and staying on top of the ever-changing market?

A financial advisor can handle the investment management piece, freeing up your time for the things you truly enjoy – spending time with family, pursuing hobbies, or traveling the world.

It’s important to remember that investment management is only a small part of what a comprehensive financial advisor does. They also provide valuable services such as cash flow management, budgeting, tax planning, estate planning, and insurance planning.

A comprehensive approach to financial planning is key. Your investments should be linked to your tax plan, student loans, and other financial aspects of your life. It’s all connected.

Reason #2: You Just Don’t Want to Do It

Let’s face it: investment management can be tedious and annoying. Do you really want to spend your time:

• Rebalancing your portfolio?
• Researching different funds?
• Reading lengthy prospectuses?

And what about making those tough “yes/no” decisions? Sometimes, it’s easier to hand that responsibility over to someone else.

Many people start out managing their own finances but eventually reach a point where they no longer want to do it. Maybe they don’t want their spouse to be upset if things don’t work out. Or maybe they just want to free themselves from the emotional burden of making investment decisions. A financial planner can remove the emotion from financial decisions.

Reason #3: You Want a Professional’s Expertise

You wouldn’t trust WebMD to diagnose a medical condition, would you? You’d go see a doctor. Similarly, you wouldn’t attempt to fix a plumbing problem without the necessary expertise. You’d call a plumber. The same principle applies to financial management.

Financial advisors bring a wealth of knowledge and experience to the table. They can provide valuable services such as:

• Tax-efficient investing
• Backdoor Roth IRAs
• Managing rollovers

Dealing with these tasks can be time-consuming and confusing. Moving money from an old 401(k) to a new one can feel like “adult babysitting” – it’s not difficult, but it requires attention to detail and can be frustrating.

A financial advisor can also help you balance risk across different accounts, a process known as asset location. They can also address the issue of clients holding too much cash on the sidelines, ensuring that your money is working effectively for you.

The “good stuff” that financial advisors offer includes organization, support, and guidance. They can help you review blog posts and podcasts, answer questions, and provide ongoing support through regular review meetings and email communication.

The Limitations of Robo-Advisors

What about robo-advisors? They offer automated investment management services at a relatively low cost (around 30 basis points). However, robo-advisors have limitations. They typically focus on a single account and don’t integrate with other aspects of your financial life.

Robo-advisors might miss important details like tax planning opportunities, 401(k) integration, and backdoor Roth IRA reporting. They simply can’t provide the same level of comprehensive advice and personalized attention as a human financial advisor.

Reiterate the Need for Diversification

Don’t give up on diversification. Even though the S&P 500 has been a top performer recently, market conditions can change. Diversification can help protect your portfolio and ensure that you’re prepared for whatever the future holds.

Remember, international stocks performed well in the years before the S&P 500’s recent dominance. While the S&P 500 could continue to perform well, diversification is still a smart play, especially for long-term investments.

Investing solely in the S&P 500 can be a risky strategy, especially for high-income professionals with complex financial lives. While index funds can be a solid foundation, comprehensive financial planning goes beyond picking a few funds.

If you value your time, don’t want to deal with the complexities of investment management, or want the expertise of a professional, consider bringing in a financial advisor. A financial advisor can help you create a diversified portfolio, optimize your tax strategy, and align your investments with your long-term goals.