Sometimes you want to underperform the stock market. This may be one of those times. As I write, the Dow Jones index is flirting with its all-time high of 16,000. Some of our core stocks are up big. There is Google up 46%, VF Corp up 57%, Becton Dickenson up 41% and Schlumberger up 36% to name a few. But still some of our portfolios are lagging the index somewhat.
Should clients be worried if they are underperforming during a big rally? We don’t think so. First of all, don’t worry too much about short term performance. Stock prices can fluctuate wildly in the short term, but over the long term are more rational. Chasing short term benchmark performance usually causes investors to take on too much risk and hurts them in the longer term.
One way to measure the risk of stocks is to look at the company fundamentals. Taking a look at a typical sample portfolio, we see that the Debt/Equity ratio is 46% compared to 73% for the S&P 500. It has a average ROE of 18.7 compared to 13.5 for the S&P. The average dividend yield is higher, 2.4% compared to 2%, and the dividend growth rate is also higher than the S&P. The average stock also has a slightly lower P/E ratio than market at 16.5. All of this translates into lower volatility and lower risk.
Rather than jumping out of stocks altogether, we recommend staying in stocks with a lower risk profile. Especially with bond yields so low, lower risk stocks are a good place to hide from a correction.