Just a month after my summary of how the Magnificent 7 (the seven largest companies in the S&P 500) dominated investment returns last year, we saw an interesting comparison in the first month of 2025. In January, the Magnificent 7 actually underperformed the remaining 493 companies in the index. One month does not make a trend, but it was interesting to see.

Have you ever noticed how much effort goes into “predicting” where the markets are going to be in a month, a quarter or a year? Financial news networks bring on a guest who says markets will be up 20% next quarter. After a commercial break, the next guest says markets will be down 20% one quarter from now. We also undertake a certain amount of forecasting ourselves, but more from the perspective of overall valuation and its contribution to long-term averages – an approach that’s more consistent with the perspective needed for meeting long-term investment goals.

We also like to look at the markets with relative opportunity in mind. For example, the S&P 500 is trading at the very top end of its historical price/earnings ratio. Knowing that the long-term average return on the S&P 500 going back to December 30, 1927 (the longest our data shows) is 9.71%, are there other allocations or portfolio realignments that should be considered?

Let’s say your ideal long-term portfolio allocation is 70% stocks and 30% bonds. To simplify things, let’s also say that the 70% stock allocation was all invested in the S&P 500, and the bond allocation was all invested in the Aggregate Bond Index. Over the previous 10 years, the S&P 500 is up 13.07% per year on average, and the Bond Index is up 1.35% per year on average. Since the bond index has been lagging the stock market, let’s assume you have left your original allocation alone and did not rebalance. Today, your portfolio allocation would be 87% stocks and 13% bonds. Relative to the long-term average return on stocks sitting at 9.71% and bonds at about 4.5%, would now be a good time for an investor to consider rebalancing? Probably. The next question is, will the investor do it? The third question is, will the investor stick to it?

It is difficult to predict what next month, quarter or year will be like – but the probability of more accurately predicting the long-term average goes up noticeably when looking at 10- or 20-year periods.

Thank you for your business and confidence in Bell!