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Under The Hood: Looking Back on What Made 2023 Different (and the Same)


Investigator looking under hood of car for clues

Fending off the Hangover

We are now about a week into 2024. Like many Americans do post-holiday season, the market has slowly crawled out of its slumber after some serious celebrating the past week. Typically, investors hang tight through December as the proverbial ‘Santa Claus Rally’ brings markets to higher ground to finish the year. This year was no exception, except that this rally started in early November and never quit. If you weren’t invested, you may have handed yourself a lump of coal. 


For 2023, broad US equities (via the S&P 500 index) returned investors 25% and bond markets 5%. Not bad from where I am standing. But for those who are staring at their Fidelity account statement not seeing the same, the question becomes— ‘where did these returns come from and why did I miss out?’ 


Obviously not all stocks in the benchmark S&P 500 move in sync. Some lose in good markets, some win in bad ones. Throughout history, great performance of a small subset of stocks, in many instances, is what provides the overall positive result. In other words, every team has a few star players that hit the home runs, steal bases and score often. They carry the team to higher levels. Who were those star players this year? 


A Look Under the Hood

Let’s introduce the ‘Magnificent 8.’ These include Amazon, Apple, Microsoft, Nvidia, Alphabet (Google), Meta (Facebook), Netflix and Tesla. Combined for 2023, these stocks provided a 77% return. If we net these out of the equation, the S&P 500 only returned 10%. I’ll take 10%, but it was actually easier (and likely less expensive) to get the 25%. 


Data like this always fuels the discussion around holding a concentrated set of holdings or holding a large index like the S&P 500 (owning the magnificents plus 400+ other stocks). The problem with the concentration-only strategy is that those same 8 stocks might be the same ones that drag the index, and your returns, down. Then we all know what happens—like riding a roller coaster down a steep drop and yelling “get me off of this thing,” human nature takes over and we sell back to where we started. Equity concentration affecting an index is nothing new. We just never know what concentration will hit the home runs or blow the game.


The chart below reinforces the impact of how a handful of holdings can carry returns above and beyond the majority. This isn’t just recent news, we are talking about the last almost 100 years. 30% of returns were dictated by only 23 companies. 50% by only 72. But, as we all know, trying to only pick just the right stocks during market cycles is a loser’s game. No matter how many times it is proven wrong, the thrill of guessing right is what sells. Investors still think they can do it. Very few succeed.


Chart: a small percentage of U.S. stocks are responsible for much of the markets’ historical returns


Chart showing the effect of stock concentration

Source: Vanguard


Taking a Dynamic Approach

There is no harm in holding a good subset of stocks/companies to try and gain an edge on the broad market. But, like building a home, don't build your entire foundation out of risky material. It has to last. In the grand scheme, long term returns are the only ones that matter.


That said, there are areas of a long-term portfolio that can warrant a more active approach. International equities, emerging market equities, high yield bonds and commodities, for example. No worries, stock pickers, there is still a place for you. 


Sound portfolio management, proven time and time again for decades, involves staying invested, proper and dynamic asset allocation, fee and tax efficiency. It is not what you earn, but what you get to keep en route to your goals.


Markets ebb and flow, as do our emotions. The two places people go wrong are letting their emotions create knee-jerk reactions and also thinking they (or even their advisor) have a crystal ball. If this is the case, we should probably talk. 



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