The Market Is Up, So Why Is My Stock Down?

The last year and a half in the financial markets has been an interesting period, to say the least. In 2020, the pandemic ran amok through the world economy, eliminating travel for many, including the daily commute to the office. Also in 2020, the S&P 500 delivered an annual return of 15.76%. In other words, for most stock market investors who rode out the very scary period in the spring of 2020, the investment news since then has been mostly pretty good.

But not every company—and thus, not every stock traded in the market—has enjoyed the robust rise achieved by the broader market. For example, New Residential Investment, a mortgage real estate investment trust (REIT) that specializes in title insurance, appraisal management, and mortgage servicing, was down 38.4% in 2020, despite what most would consider a red-hot real estate market. For other companies, a poor performance record is easier to understand. Consider Spirit Airlines, one of the low-price leaders in the air travel industry. Spirit’s reputation for providing the most economical prices on flights wasn’t enough to fill empty seats on its aircraft during the pandemic, and as a result the stock was down 50% in 2020. Similarly, Carnival Cruise Lines was forced to idle its fleet during the pandemic, and the stock value fell by nearly half. Interestingly, though, Carnival’s stock price has recovered to a large extent. Through about first half of 2021, it had recovered by just over 25%. Other loss leaders for 2020 included some of the world’s largest companies: Exxon Mobil was down 41%, and Wells Fargo fell more than 43% during the period.

All this goes to demonstrate the value of diversification. The companies mentioned above are, by and large, well-managed and soundly financed enterprises that will, in all likelihood, weather the financial storm and continue to provide value for years to come. But they demonstrated poor results during a very challenging period, even though other companies did not. Could an analyst have predicted accurately what these companies’ results would be, prior to the events of 2020 and 2021? It is unlikely. And that is why we urge our clients to diversify broadly: because it is impossible for anyone to predict what a particular stock or even group of stocks will do during any given time period. The fact is that investors who held a properly diversified portfolio during 2020 and 2021 have generally done well—not because every stock in the basket performed equally well, but because, in the aggregate and over time, the winners have more than made up for the underperformers. History and financial research lead us to believe that over the long haul, investors who are well diversified, patient, and disciplined will reap the benefits of the markets’ long-term tendency to rise higher than they fall.

As fiduciary wealth managers, we seek to provide reliable, evidence-based counsel to our clients as we help them seek superior long-term returns. To learn more, click here to read our white paper, “The Informed Investor.”

Buen Camino!