July Makes US Stock Diversification Sexy Again

John Owens,

CFP®, EA, ECA, CPWA®
MANAGING PARTNER

For the bulk of 2024, diversification beyond the S&P 500 could have been described as unsexy. That index, propelled by some big tech names that dominate both its composition and drive its bottom line – did remarkably well that more and more conversations were happening about the benefits of diversification.

I’ve heard it many times in my career – why diversify, why own more than the S&P 500 – an index that has done amazingly well since the end of the Great Recession.

And each time those calls get louder, and questions spring up, it’s often a contra-indicator that the market rebalances your portfolio if you don’t – and that we ought to own more than just one asset class.

That lesson was on full display in July, as we saw a significant rotation in asset class performance in the US stock market. As we wrote in our recent commentary at the end of June, larger US stocks were getting more expensive, while smaller US stocks were relatively cheaper. That still holds true, but we’ve seen some convergence performance so far in Q3.

At the end of the second quarter, growth-oriented US large company stocks (Meta, Nvidia, etc.) were up almost 21% year-to-date, while smaller, value-oriented US companies were down about 1%—a 22% spread between the different styles.

As of July 29th, those same growth-oriented US large companies shed their gains to 17% year-to-date, while smaller, value-oriented companies are now up about 10.5% this year—tightening the gap from 22% down to less than 7% in merely four weeks.

So if you owned a portfolio of all large growth stocks, July might have been a rough month, after a great start to the year. And if you owned a portfolio of all small value stocks, the first half of the year would have been brutal – but July was great. However, if you owned both in your allocation, one seemingly did well when the other faltered a bit this month – with gains on one side of the portfolio offsetting losses on another side. And this is the true benefit of diversification.

While we’ve often joked that you likely won’t spend a dinner party bragging about your diversified portfolio – as it’s much more fun to boast about how you KNEW Nvidia was going do well in the AI era to your friends – this month has been a solid reminder that diversification truly is sexy and when done right can help your bottom line.