A Stock Market Ripe for Chasing Heat

Many investors have likely seen statistics highlighting a lack of breadth in equity markets in 2023. This storyline isn’t new. Many readers may remember past years when the ‘FAANG’ and other key technology stocks were the primary drivers of returns. This year, the tech giants are back, with Apple, Microsoft, Nvidia, and Amazon contributing a lion’s share to the S&P 500’s year-to-date return. Meanwhile, more than half of the stocks in the S&P 500 are down for the year.¹

For investors, the implication is that if you don’t own these key tech players, then you may also be disappointed with year-to-date returns.

This brings up one of the ‘Zacks Advantages’ of tactical ETF investment. Having ETFs in a portfolio generally gives investors broad ownership of equity markets on a cap-weighted basis—meaning that bigger companies influence returns more than smaller ones do. So, if you own a diversified set of ETFs – as we do at Zacks Advantage – then in all likelihood you also own the key companies driving returns in 2023 in a higher proportion to other companies in the stock market. In other words, depending on your specific allocation, there’s a good chance you’re overweight the outperformers.

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A Better Way Forward for Passive Investors

Passive investing using ETFs has become popular, allowing virtually every investor to participate in the stock market with an ETF index fund that tracks the S&P 500. Unfortunately, these funds make it difficult to beat the market—because an index fund essentially is the market.

Zacks Advantage offers a better way forward: We have always been committed to a research-driven investment process, and we have refined our active investment experience to optimize the passive investment realm. Our actively managed robo advisor offers:

• Targeted asset allocation
• Automatic diversification
• Built-in discipline
• Simplified investing – with low fees!

Learn more with our free guide, A Better Way Forward: Actively Managing Passive Index Funds ²

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Investors who maybe choose to self-manage, or who own a portfolio of individual stocks, may feel like they’re falling behind if they do not own Nvidia, Apple, Microsoft, and so on.

A good example of how this can look is comparing the year-to-date performance of the Dow Jones Industrial Average to the S&P 500 or the Nasdaq. The Dow is a price-weighted index, meaning that companies with a higher share price – but not necessarily a higher market capitalization – make up a larger share of the index.

For example, United Health Group is the biggest stock in the Dow today because it trades at around $500 a share, and makes up about 9% of the index. Apple is also in the Dow, but since it’s priced around $180 a share, it only makes up about 3% of the index. That means for the Dow, Apple’s strong performance in 2023 is being diluted by United Health Group’s weak performance.

As a result, the Dow is only up about 2% in 2023 while the S&P 500 is up over 10%. Investors experiencing this performance dispersion probably don’t feel great about it. In fact, behavioral finance and neurological studies almost certainly tell us they don’t.

When an investor notices underperformance in a year when the stock market as a whole is doing well, it can create what psychologists call “loss-chasing.” The result is that an investor’s fixation on underperformance leads them to take bigger risks more frequently, often without rigorous analysis since the expediency of making up losses becomes important. Investors often end up making decisions based on what they think will go up the most quickly, which often leads them to stocks that have been outperforming recently. That’s heat chasing.

This behavior is difficult to curb. Neuroscientists have conducted studies showing that when an investor ceases ‘loss-chasing,’ it can activate the part of the brain that is responsible for emotions like pain and disgust. That makes chasing losses, i.e., risk-taking, hard to quit, especially if it means you must resign to feeling awful about it.

Which again brings up the point of heat chasing. Since investors don’t want to feel that pain and disgust, they often give in to the temptation to want to get back to break even quickly, which leads to flawed decision-making that often runs counter to one’s longer-term goals—and also rarely results in consistent success.

Bottom Line for Investors

The lack of breadth in the current market—with a few key names contributing a lion’s share to total index returns—means that investors who don’t own those names may be feeling a sense of urgency to make up lost ground. At worst, a fixation on underperformance can lead to loss-chasing, which we know tends to fly in the face of prudent risk-taking.

For investors who may be experiencing this performance dispersion and/or frustration in 2023, remember that investing is often about accepting losses and remembering that a longer-term, diversified approach is the clearest path to achieving financial goals with appropriate risk and reward balance. Our brains are not wired to let us think that way naturally, so arriving at that conclusion requires effort and resolve. But then again, so does being a successful investor over time.

A key part of avoiding loss-chasing is the ability to zoom out—to focus less on year-to-date 2023 and more on what you want your 10-year annualized return to be. That should be the primary driver of your short-, medium-, and long-term decision-making process.

In recent years, passive investing has become a popular approach, allowing virtually every investor to participate in the stock market with an ETF index fund that tracks the S&P 500.

However, a purely passive approach cannot beat the market (because it basically is the market). That’s why Zacks Advantage offers an actively managed robo advisor that:

• Invests exclusively with ETFs
• Uses technology to recommend the appropriate mix of equities and bond ETFs to help achieve your investing goal and specific risk tolerance
• Lowers fees and expenses

Get our free guide, A Better Way Forward: Actively Managing Passive Index Funds, to learn the 4 issues that can hold back returns for passive investors, and how Zacks Advantage can help you overcome them.

Download our FREE Guide ³

*This rating was awarded by The Robo Report on 4/1/2023 in respect of the period 1/1/2023 to 4/1/2023. We do not compensate The Robo Report to obtain this rating. However, we pay compensation to the Robo Report to use their logo in connection with advertising this rating.

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¹ Wall Street Journal. May 19, 2023.

² Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion.

³ Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion.

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