“Show me who your friends are and I’ll tell you who you are.” When it comes to investment management, portfolio managers want to “befriend” the S&P 500 (SNP: ^GSPC ).  Ideally, hoping investment results mirror or beat the S&P 500 (or other benchmarks).

In essence, if you show me the S&P 500’s performance, you will be showing me your portfolio’s performance. This is fine and dandy in an up market, such as throughout the 1990s, but how did your portfolio do last year? Do you have to benchmark your future for better and for worse? Is benchmarking just an easy excuse for fund managers who had lost a good chunk of your money?

According to your money’s best friend - the S&P 500 (NYSEArca: SPY) - your portfolio probably lost around 50% last year. Looking back further, most portfolios in cahoots with the S&P are down roughly 30% over the past ten years.

If my child were to hang out with friends displaying sub-par behavior, I surely would be concerned about the kid’s future development. If your portfolio is linked in any form to the S&P 500, there’s reason to be concerned about your financial future as well.

Whether your portfolio over or under-performed its major benchmark by a few basis points, becomes nothing more than a nuisance if the benchmark drops 20, 30, 40, 50% or more.

The S&P has rallied over 50% since its March low. As far as friends are concerned, your portfolio is linked to an index in “rehab.” The final outcome of rehab is still up in the air, you can’t be sure if the recent trend is a new beginning, or just a break before the next relapse. Wouldn’t you want to be sure before you connect your financial future to a volatile “friend in rehab?”

In bad company

The S&P 500 is not the only “bad kid on the block.” Other indexes performed just as bad. In fact, the Dow Jones (DJI: ^DJI), Nasdaq (Nasdaq: ^IXIC), Russell 1000 (NYSEArca: IWB), Russell 3000 (NYSEArca: IWV), MidCap 400 (NYSEArca: MDY), Small Cap 600 (NYSEArca: IJR), MSCI EAFE (NYSEArca: EFA) and emerging markets (NYSEArca: EEM) indexes spotted the same rotten behavior.

Just because everyone does it, doesn’t mean it’s right. Even though Wall Street is (allegedly) a place for grownups; when caught “in the act”, or with sub-par behavior (aka performance), its misguided managers and analysts resort to the childlike, “but they did it too”, attitudes. If your large cap fund is down 50%, the first response you can expect to hear is; “but the S&P 500 is down 50% too” as if it is impossible to display proper behavior amongst rotten peers.

Bad parenting

The only one in a position to really discipline Wall Street and its flawed approach (to rise to a position of parenting so to speak) are individual investors as a composite. The SEC has obviously failed to keep fund managers and financial institutions (NYSEArca: XLF) in check.

Unfortunately, however, according to a recent Charles Schwab survey, 60% of investors have made no changes to their portfolio allocations since the stock market began to decline. Only 45% have become more knowledgeable about their investments since the financial crisis began roughly two years ago. 36% still do not know which mutual funds they own.

As far as parenting is concerned, investors are missing the mark and indirectly supporting bad performance via their actions, or according to Schwab’s survey, lack thereof.

Good parenting

Unlike Wall Street, which follows the current trend, the ETF Profit Strategy Newsletter has been bucking the trend since its inception.

Early January, when Wall Street thought that the Santa Claus Rally – the S&P 500 rallied 8% from December 23rd to January 6th – and the first five days of January’s barometer supposedly foreshadowed a bright future, the newsletter recommended to sell long positions and load up on short ETFs like the UltraShort S&P 500 ProShares (NYSEArca: SDS).

From this point on, the market declined relentlessly pushing short ETFs to the top of any top performing funds list. Many short ETFs gained 100% or more in less than 90 days.

On March 2nd, when Wall Street was muddled in self pity and braced itself for further losses, the ETF Profit Strategy Newsletter sent out a Trend Change Alert, predicting the most powerful rally since the October 2007 all-time highs.  The newsletter recommended selling all short ETFs and buying long and leveraged long positions, like the Ultra S&P 500 ProShares (NYSEArca: SSO) and Ultra Financial ProShares (NYSEArca: UYG).

On March 6th, the Wall Street Journal featured an article titled: “Dow 5,000. There’s a case for it.” Ironically, that very day, the market bottomed and went on to rally 50% and more, over the next several months.

Rollercoaster boomerang

After a seven month roller coaster ride, the market has essentially returned to where it was earlier in January. The Dow is once again above 9,000 and investors feel jolly about the future prospects of this rally.

Even more, most investors who had taken a 50% loss previously, feel that their buy-and hold benchmark strategy is working again. Keep in mind though, after a 57% drop from S&P 1,565 to S&P 666 and a 51% rally from S&P 666 to S&P 1,010, your portfolio – if benchmarked – is still 35% below where it was two years ago. The Dow Jones (NYSEArca: DIA) paints a similar picture.

It doesn’t take a rocket scientist to figure out that after a 50% rally, the downside risk is much bigger today than it was a few months ago, while the upside potential is limited, very limited.

In terms of investor sentiment, point and percentage gains, and many other factors today’s market parallels January 2009, October 2007, and even worse; April 1930. It doesn’t take a history major to know what happened in each instance.

Another Trend Change alert by the ETF Profit Strategy Newsletter is not far away. The latest issue includes a target range for a top and time-frame for this rally, along with a target range for the ultimate market bottom. Weekly updates provide further insight into the market’s whereabouts.

The analysis of all reliable market indicators shows that the market’s current rally will enter the history books as an unsuccessful attempt at “rehabilitation.” The subsequent relapse may prove to become one of the darkest chapters in history. Don’t allow your portfolio to hang out with the wrong crowd.