Many investors wonder why their investment portfolios don’t keep up with the major indexes they see on the evening news. Specifically there is the Dow 30, NASDAQ, S&P 500, the Russell and a plethora of other perhaps not so well known indexes whose coverages span the globe.

Indexes measure a basket of stocks that are in that particular index.

For example, the Dow encompasses 30 stocks thought to represent a broad base of industries in the United States. One cannot invest in the index per se, as it is only a measuring stick for the stocks in it.

Like many other indexes, their make-up is adjusted according to whatever metric the measuring method stipulates.  One can buy the stocks measured by the index, but because adjustments are made to that index from time to time, it would be difficult to mirror the index exactly.

There are funds that attempt to replicate the measuring metric of an underlying index, but the key word here is attempt. Most of these funds, however, do a pretty good job of at least coming very close to replicating in its movements the index underneath the fund.

Because these funds do mirror the subject index, if an investor holds one of these index proxy type funds, their portfolios will more or less follow the performance of the index.

Now to the question at hand: why does my portfolio not move with the indexes I see on the evening news?  In other words, if I see the Dow moved up 12% for the year, why did my portfolio move up only 4%?

The question is a good one because understanding the answer will also give an investor a better understanding as to how his portfolio is constructed. In other words, what does he hold and why does he hold it.

It is common for advisors and astute investors to adhere to at least some if not all of the Modern Portfolio Theory (MPT), which gives a matrix on what to hold in the portfolio and what percentages of each might be considered.

Not everyone might agree with MPT and their allocation percentages might differ, but MPT basically uses good common sense in its makeup of recommendations.  Quite simply, MPT recommends holding a basket of different stocks and industries, known as diversification, and adding to that a percentage of fixed income securities.

Fixed income are securities that offer a fixed or somewhat fixed rate of return, with more emphasis on a fixed rate of return (hence the name fixed income) in lieu of price movement (known as growth).

The thinking is fixed income can move opposite of stocks in price, and offer a set rate of return so the investor can rely on some sort of what I call “rent” money instead of relying on a stock going up in order to make money.

Fixed income is usually debt instruments such as bonds, notes or other type of debt, but also would include preferred stocks and certain funds and baskets that encompass similar securities. Fixed income, although has the word “fixed’ in it, does not mean the price cannot move and therefore does not mean it cannot go down in price. Fixed income holdings can move up and down. It is thought and historically so, that more often than not, fixed income can be more stable than traditional stocks.

Fixed income also has a tendency to move in the opposite direction of stocks, as investors gravitate from taking more risk in an up market and selling off their fixed income holdings to go for higher returns in stocks. When nervous however, investors may sell stocks and buy more fixed income for the perceived safer holding that fixed income historically has demonstrated. Hence their inverse relationships.

Because of the opposite movements of fixed income and traditional stocks, their price movements may often offset each other, and therefore handcuff the portfolio’s return when compared to the indexes in general and as a result, portfolio performance often lags the gains or losses of the major indexes.


Fixed income may lose money, and may at time moves in concert with stocks and do not guarantee against losses. Returns may not be guaranteed and MPT does not guarantee performance nor prevent losses. Past performance does not guarantee future results. Investing involves risk. You can lose money. Not a recommendation to buy or sell any securities and does not represent the opinion of any bank, RIA or brokerage firm. Mr. Cuniberti holds a B.A. in Economics with honors and hosts Money Matters radio on 67 stations nationwide. (530) 559-1214. California Insurance license 0L34249.





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