Getting ready for 2021

Steve Merrell |

Q: I have been very frustrated with my portfolio this year. The S&P 500 and the Dow keep setting records, but my portfolio is lagging way behind. In fact, while the indexes are up big, my portfolio is only breaking even this year. What is going on? Should I change things as I get ready for 2021?

A: When the world economy shut down last February to combat the coronavirus, stock markets around the world went into freefall. In a matter of a few weeks, the S&P 500 index shed more than a third of its value. Fortunately, the Federal Reserve stepped in and supplied massive amounts of liquidity to stabilize the financial markets. Congress did its part, too, and the markets rebounded dramatically.

However, the market’s rebound has not been uniform. While a few large high-profile stocks have made massive gains, most other stocks have not. A closer look at the S&P 500 index illustrates what I mean.

The five largest companies in the S&P 500 index are the so-called “mega-techs”—Apple Computer, Microsoft, Amazon, Alphabet (the parent of Google), and Facebook. Together, these stocks account for 22 percent of the value of the S&P 500. As a group they are up 60 percent in 2020. The S&P 500 index, on the other hand, is up just over 14 percent for the year. Given these facts, a little algebra reveals that the other 495 stocks in the S&P 500 index have only gained about 1 percent this year.

Which bring us back to your portfolio. Assuming your portfolio is invested in high quality companies and is properly diversified, the fact that you are lagging the market may be caused by having less exposure in your portfolio to mega-tech stocks. That doesn’t necessarily mean your portfolio is bad or that you are a bad investor. It simply means you have chosen to invest in other types of stocks. If it helps you feel any better, you are in good company. Legendary investor Warren Buffet’s Berkshire Hathaway is up only 0.58 percent for the year. These things come in cycles. Chances are good that the non-mega-tech stocks will do better in the months ahead.

Q: My wife and I want to retire in 2021, but we are a little afraid of the market’s volatility. What if we retire and the market drops like it did last March? How can I be sure we will have enough?

A: Several years ago, U.S. companies started making a big shift in their retirement plans. They found it was a lot cheaper to sponsor defined contribution plans, like 401(k) plans, than it was to sponsor and fund defined benefit plans, like traditional pension plans. The defined contribution plans were also more portable. When an employee left for a new job, they could take their 401k balances with them. The handoff was a lot cleaner and much simpler for everyone.

While these benefits were great, the advocates of defined contribution plans failed to take human nature into account. It turns out a lot of people don’t want to be professional investors. They don’t like doing the basic research necessary to build solid portfolios. They don’t like the effort it requires to monitor the progress of their portfolio. And they really don’t like seeing the value of their savings bounce all over the place. As a result, retirement planning gets short shrift. Many people approach retirement hoping that somehow their savings will be sufficient.

With this in mind, I strongly recommend that you find a knowledgeable and reliable financial planner to help you design a plan for your retirement. It will cost you some money, but a good plan can help you retire with confidence despite market volatility.

We know that volatility is a fact of life in the equity markets. During most years—even during really strong years--there is a point at which the stock market experiences a significant decline. The key to prospering when the market is crazy is to build a strong portfolio before the market comes under attack and then to keep your discipline when the selling pressure builds. This can be difficult, but if your portfolio is invested in high-quality assets and is properly diversified with enough liquidity to fund near-term withdrawals, you should be able to ride through the storms with confidence. A good planner can help you build such a portfolio.


Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to