The Stock Market Darlings: Then and Now
In the recent episodes of our Revamping Retirement podcast, we have discussed the changes in retirement plans since I started working for Cammack Retirement Group way back in December of 1991 (yes, I’m old!). As you may imagine, things are quite different - from plan design, to investments, to technology. While recording these podcasts, I also started thinking about how difficult it can be to pick prudent investments over this time period (which, while a lengthy 27+ years, is not even as long as the length of my entire working career, or the working career of many others). For example, let’s look at the so-called “darlings” of the stock market; namely the top-10 largest companies as measured by the total value of their stock (market capitalization), both around the time when I first started working at Cammack Retirement, and today:
|1. Nippon Telegraph and Telephone ||1. Microsoft|
|2. Bank of Tokyo-Mitsubishi||2. Apple|
|3. Industrial Bank of Japan||3. Amazon|
|4. Sumitomo-Mitsui Banking||4. Alphabet|
|5. Toyota Motors||5. Berkshire Hathaway|
|6. Fuji Bank||6. Facebook|
|7. Dai-Ichi Kangyon Bank||7. Alibaba Group|
|8. IBM||8. Tencent|
|9. UFJ Bank||9. Johnson & Johnson|
|10. Exxon||10. ExxonMobil|
As you can see, the lists are almost completely different - the only commonality is Exxon (now Exxon/Mobil), which had to complete a merger to remain. The 1990 list was dominated by Asia-based companies (mainly financial in nature), but the Asia stock market crash changed that. The 2019 list is filled with American tech companies - half of which did not even exist in 1990!
Thus, it is not easy to be a good “stock-picker,” particularly over lengthy time horizons, such as the time necessary to investment for retirement. That’s why it is generally not a great idea to invest in individual stocks in your retirement plan, even if the stock is that of your own company. Fortunately, most plans provide mutual funds as their core investments, so participants can enjoy the diversification of owning hundreds or even thousands of stocks via these investment vehicles. And it doesn’t stop there; participants can similarly diversify their stock holdings across asset classes such as bonds, stable value, and specialty categories, such as real estate. Alternately, they can refrain from selecting individual mutual funds altogether and instead invest in a target date fund that will do the diversification for them (this is another option that did not exist in retirement plans when I was first hired at Cammack Retirement back in 1991).
Utilizing multiple mutual funds covering varied asset classes (or a target date fund) is important as well, since, like individual stocks, it is difficult to select a mutual fund that will consistently outperform over the type of time horizon that is necessary in a retirement plan.
For the plan sponsors out there, try conducting this exercise sometime: take a look at your investment array from 1990 - how many investments are the same in your array today? I suspect not that many! It is important to remember that the investment darlings of today are unlikely to be the investment darlings of future decades - which is why slow and steady, in the form of proper investment diversification, wins the race.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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