Diversify Beyond Large-Caps as Financials Struggle Amid High Valuations

Investors in S&P 500 index funds already have access to many top financial stocks, including Berkshire Hathaway, JPMorgan Chase, and Goldman Sachs. However, despite this broad exposure, the financial sector has struggled over the past year, with flat returns on a cumulative basis.

The sector's poor performance is attributed to several factors, including higher interest rates, which increase borrowing costs and could hamper lending. Additionally, rising prices in an uncertain economy are not ideal for financials, and high stock valuations make corrections more likely.

To diversify their portfolios, investors should consider adding small-cap and mid-cap stocks and ETFs, as well as value stocks and international investments. Vanguard predicts that value stocks will outperform growth and large-cap stocks over the next 10 years, with average annualized returns of 6.4% to 8.4%. Small-caps are expected to return 4.7% to 6.7%, while international ex-US stocks are targeted for a 4.5% to 6.5% annualized 10-year return.