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Should I Compare Myself To The S&P 500?

Should I Compare Myself To The S&P 500?

April 23, 2024

As the financial media reminds us almost daily, the S&P 500 Index has been on quite a tear recently. Over the five years ended in March, the S&P 500 Index returned +15.1% per year. Over the last ten years, it’s averaged +13% per year. This is much better than the index’s long-term average of about +10% per year and well above the returns on value stocks, smaller stocks, and especially international stocks that Servo clients also own.

Whenever a particular asset class or strategy has outpaced everything else, some diversified investors wonder whether they should do something different. Years ago, real estate, commodities, and the BRIC countries in emerging markets (Brazil, Russia, India, and China) were hot. Those fads have all come and gone, but today’s darling isn’t so easily dismissed because it hits closer to home. “Why don’t I put all my money in the S&P 500? It’s doing way better.” Other investors might wonder why they’re underperforming and worry that their portfolio allocation isn’t good enough. Either way, recent returns raise the question—should I compare myself to the S&P 500?

The short answer is no. There are various appropriate ways to track and evaluate your diversified portfolio, which I will explain, but comparing it to the S&P 500 isn’t one of them. Why?

Beating the S&P 500 isn’t an appropriate goal.

Earning a rate of return on your savings sufficient to reach your future objectives is an appropriate goal. The best way to achieve this goal is to earn this return as consistently and dependably as possible.

Suppose you’re saving for retirement, and your plan calls for a 6% return above inflation (let’s assume inflation will match its historical average of 3%/yr). In that case, your goal is to earn +9% per year over time on your portfolio. If, over the last five years, you earned +11%, but the S&P 500 earned +15%, you’re fine; you’re ahead of plan. You just haven’t beat the S&P 500.

But you’re probably still thinking—I could have done better just owning the S&P 500!

Sure, if you knew five years ago that the S&P 500 would average 50% more than its long-term average. What if it did worse? What if you got the -2.3% per year return the S&P 500 earned from 2000-2004? You would be so far behind plan that it could take years and a significant amount of additional savings to catch up. And unnecessarily, because over this stretch, a more diversified portfolio with value, small cap, and international stocks did much better—an all-stock asset class allocation returned over +10% during this period.

So, my first point is this: compare your portfolio’s return to the result your plan calls for to reach your goals, not the performance of some arbitrary index. And your return goals are easier to meet, more consistently, with a balanced portfolio diversified across different stock (and maybe bond) asset classes. Sure, you might miss out on a bit of return when a single asset class goes on a run, but you also won’t necessarily fall flat if you pick the wrong asset class and it has a low or negative return.

Next, let’s dig a little deeper. Why even consider comparing yourself to the S&P 500 Index? It is a basket of mostly US large growth stocks—big companies with relatively high prices. That’s not the entirety or even the majority of what you own in a diversified asset class portfolio. Again, you own many more value stocks, smaller stocks, international stocks, etc., all different from the holdings in the S&P 500. Maybe even some bonds. Of course, the S&P 500 has done so well lately, and we’re naturally drawn to its high recent returns and feeling a bit of FOMO. However, you’ll recognize this is an inappropriate apples-to-oranges comparison once you come to your senses.

Suppose we want to see how our portfolios are doing. In that case, we have to compare our funds to indexes of stocks or bonds that have similar holdings and characteristics. For example, the Russell 2000 Small Cap Index can be used as a comparison for a small cap fund, or the Russell 2000 Small Value Index can be used as a comparison for a small value fund. We don’t want to compare a small cap value fund to a large and mega cap stock index like the S&P 500. We might as well compare it to an international stock index or a bond index; they’re equally unrelated.

I don’t often show clients fund versus index return data because it’s a level of detail (some would say minutiae) that most do not care aboutI care about it and love to look at it regularly from many different angles. But I’m a rare financial advisor who is a CFA charter holder. I also do it so you don’t have to. Clients should trust that I have them in what I believe is the best portfolio for their situation and the best funds to capture the returns of the different segments of the market that they need to own.

But maybe, because you’ve already read this far, you’d like to look at how some of your funds have done. Here are, for example, several easy-to-understand and compare funds common to many Servo clients, without being a complete representation or the only funds clients own.

Compared To What?

The performance table below lists the five-year returns of several core stock asset class mutual funds. Directly underneath are the related Russell or MSCI indexes to which we should compare the funds to, the index that is contained in the fund’s prospectus.  Five years isn’t enough time to draw any concrete conclusions but it is the period when the S&P 500 has soared, so we’ll go with it.

How to intrepret the table? If we had seen the funds consistently underperform their index, we would at least want to understand why. If it happens frequently and long enough, we may decide to give up the effort to outperform the indexes altogether and buy the associated index fund. Nothing we do is ever set in stone. We want to be disciplined, not dogmatic. Fortunately, that’s not a decision we have to worry about.

The most S&P 500-like fund in the table is the DFA US Large Cap Equity Fund. But it owns a few more stocks (especially mid caps), and slightly overweights companies that are cheaper and/or more profitable. Its index is the Russell 1000 Index, which it matched in return. It was also very similar to the S&P 500’s return. Every other fund has done worse on an absolute basis but also much better than its index.

The DFA US Large Value Fund beat its Russell 1000 Value Index by 0.7% per year. Disappointed that it didn’t beat the S&P 500? Sure. But it doesn’t own those stocks. It owns large value (i.e., cheaper) companies. And large value stocks, as defined by the Russell 1000 Value Index, only earned +10.3% per year. The DFA fund did better, returning +11% per year. 

Over time, we want our value and small-cap funds to earn higher returns than the S&P 500, but they won't do that during periods when value stocks and small stocks don't do well, as measured by the index returns. When value and small cap stocks are out of favor, the best we can hope for is that the funds are able to keep up with the index, and maybe do a little better. And this is what we see—lower overall returns from other asset class funds but far better than their index.

US small value stocks were a big disappointment over this period, the Russell 2000 Value Index returned only +8.2% per year. But the DFA US Small Value Fund again managed to squeeze a higher return out of the asset class, returning +12.8% per year, or +4.6% better annually. The DFA fund got close to the long-term average for small value stocks of +13% per year (Dimensional US Small Value Index, 1928-2023, +13.2% per year) despite the index only earning high single-digit returns. Again, it is a disappointment on an absolute basis, but relatively speaking, an outstanding return.

Finally, what about international stocks? They’ve really disappointed over this period. The MSCI World ex-US Value and Small Value Indexes only returned +6.6% and +5.8% per year, respectively. Yikes. That’s not even in the same time zone as the S&P 500. However the DFA International Value and Small Value Funds managed a better result, both earning about +2% per year more than their indexes.

These fund returns are even more impressive than they first appear when we realize they're net of expense ratios and trading costs, while index returns don't include any fees.


Should you compare your portfolio to the S&P 500? Hopefully by now you understand why you should not.

First, instead, focus on your return goals—if you need an 8% to 10% long-term return on your savings to retire comfortably, track your progress based on those returns, not the S&P 500, Nasdaq, Dow Jones Industrial Average, or any other index results you always hear about. If you’re retired and spending 4% to 5% per year from your portfolio, then inflation plus 4-5% is your target.

Second, if you want to compare your portfolio to anything, compare it to a weighted average combination of relevant indexes. I can always prepare this research and provide it to you (and review it). For example, suppose I compare the DFA fund to index returns in the table above across a diversified asset class allocation. The DFA mutual fund mix returned +11.7% per year, and the index version was just +9.6% annually.

One benefit of this comparative exercise is it reminds you that your portfolio is well diversified, that you hold several different types of stocks and bonds. Less obviously, it also helps you see the benefits of using DFA funds to represent the various asset classes we own. Very quietly, DFA has compiled one of the most impressive track records in the financial industry. While 80% to 90% of traditional active managers fail to beat their index, and index funds are guaranteed to underperform their index (by their expense ratio), DFA has managed to outperform their indexes in 90%+ of the categories where they invest*. It’s a model of consistency over a remarkable length of time that I’ve never come close to finding anywhere else. This is one of the reasons I'm not willing to sell them from your portfolio if they were to have a "disappointing" year or two, and don’t jump on every new upstart fund shop marketing a better way with sizzling backtests. There are compelling reasons to stay disciplined with DFA.

Tracking your portfolio’s progress based on your long-term return goals, and even doing side-by-side evaluations between the closest indexes to the funds that you own—that’s what you should be comparing yourself to. That is apples to apples.

Do you have auestions about your portfolio? Use the Schedule A Call button to set up a time to chat. Servo clients can, of course, also email or call if they prefer.

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Diversified Asset Class Allocation = 21% US large cap, 21% US large value, 28% US small value, 18% international large value, 12% international small value, rebalanced quarterly.

*statements regarding the return of DFA funds versus indexes is dependent upon the funds and time horizon chosen. 90%+ outperformance statement is based on the following study:

Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or additional expenses except where noted. Indexes and mutual funds shown are for illustrative purposes only and may not be the only or any of the funds that Servo clients hold. Servo was not managing client portfolios over the entirety of the periods shown. This content is informational and should not be considered an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.