Merry Christmas to our readers. The following is a painting by Italian artist Mattia Preti who lived from 1613 to 1699. The painting is titled “The Nativity (Adoration of the Shepherds)”.
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Credit: Mattia Preti
Source: Liverpool Museums
Have a Happy and Prosperous New Year too !
Canada’s benchmark S&P/TSX Composite Index is up by 7.12% on price return basis year-to-date as of December 21, 2023. The YTD total return, which includes reinvested dividends, is even better at 10.58%.
The TSX Composite Index has generated an annual total average return of 7.51% over the past 100 years from 1920 to 2022 according to a report by AGF Management Limited. As with other developed markets, there have been more positive years than negative during this period. Another point to remember is that many times negative years are followed by positive years as hi-lighted with one example in the chart below. This shows the importance of staying in the market for the long-term.
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Source: 2023 Quick Reference Guide, AGF
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Investing in equity markets involves risks. There are many types of risks and one of those is the risk of the unknown. Ideally investors would like to have a perfect world where there are no crises or unknowns so they can invest without having to deal with them. To put it another way, there are always reasons to not invest in the stock market. There are always one crisis or another that investors face. For instance, some of he risks that investors face include the ongoing crisis in the middle east, Ukraine-Russia war, etc.
I came the below graphic that shows 95 different reasons that investors had to invest in stocks since 1928. Over the decades there have been many crises from Cuban missile crisis to Vietnam war to the recent covid-19. Through all these crises stocks have gone up slowly higher as shown in the second chart below.
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Source: 95 Reasons Why People Did NOT Invest in the Stock Market, Orion Portfolio Solutions
The key takeaway is that at any given time there will always be a reason not to invest in stocks. The trick is to ignore those noises and invest as per one’s risk tolerance and long-term goals.
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Investing in equities and bonds is one of the best ways to grow wealth. This is especially true when it comes to long-term. Over many years or decades due to the effect of compounding stocks have historically generated the highest returns over bonds and other assets. The following chart shows the growth of $1 from 1926 to 2022. Small caps had a higher return than large caps in this long period. The chart also shows the return on bonds and T-Bills together with inflation.
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Source: New York Life Investments
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The S&P 500 is the benchmark index of the US equity market. The index is considered as the barometer of the economy. Since it is diversified with all the major industries represented it is a true representation of the American economy. However there is one major drawback in the construction of the S&P 500. This is because the index is Market-Cap Weighted. This means stocks with higher market capitalization have a bigger impact on the index. Or to out it in another way companies with largest market capitalizations have the largest weight in the index.
Currently the tech sector accounts for the largest weight in the index and the companies with the largest market caps are: These are Apple(AAPL), Amazon(AMZN), Microsoft(MSFT), Alphabet (GOOGL). Tesla(TSLA), Meta Platforms Inc (META) and NVIDIA Corp (NVDA). As these stocks have soared this year, so has the S&P 500. The index is up over 20% YTD. If we exclude these firms, the return of the index is average.
The sector composition of the S&P :
Source: S&P
When the largest constituents in the S&P 500 go higher and higher in prices naturally the overall index price also increases. But high concentrations of certain sectors also can lead to dramatic crashes. The past two bear markets are examples of this scenario. High concentrations in the tech and financial sectors led to the two bear markets that were brutal to say the least.
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Source: 10 things every investor should know about investing workbook, John Hancock Investments
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