Diversification Is On Sale
|
|
Volatility Making You Queasy?
|
How are you feeling about your current investment positioning? And what is your plan going forward? Recent swings in stock prices have a lot of investors thinking about the answers to these questions and wondering when things will calm down. The reality is that the recent volatility is quite normal, see chart below
i
. Perhaps we have just become used to, or lulled into, or spoiled by, stable stock market activity.
|
|
We Still Like Diversification
|
Since 2013, U.S. stocks have been the place to be, leaving bonds, international stocks, and other asset classes in their performance dust as U.S. returns have flourished. Are you the investor that will only buy “what’s working”, a popular momentum approach? If so, you’ve most likely reaped some benefits. But momentum strengthens and fades, and it is often a very active but difficult strategy to consistently execute with success. The following chart
ii
shows performance of asset classes over the past 15 years and year-to-date thru 9/30/18. As you can see, over the past five years (2013-17), Large Cap stocks (S&P 500 index) have outperformed every other asset class, leaving the idea of diversification as some out-of-date, old school train of thought.
|
|
(Speaking of old school, here are two popular sayings for sunny days: “Make hay while the sun shines” and “Fix the roof while the sun shines”. We’ll get to those in a moment.)
The left side of this chart, though, tells quite a different story… one where a diversified portfolio performed in line or better than the S&P 500 index, with less risk and volatility. This included exposure to international stocks. We believe this diversified approach is quite prudent and will reward the patient long-term investor as momentum is transferred among asset classes. The key here is patience. We like this quote by a well-known investor:
“The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” — Warren Buffett
|
|
We mentioned higher volatility earlier, but let’s touch on the severity and frequency of stock price changes. The chart below from American Funds
iii
illustrates in more detail what it means to be a stock investor… basically, that stock prices don’t just go up. In fact, 10-20% declines are not that uncommon.
|
|
Still wondering how those old school sayings fit in? There are times when it makes sense to be more aggressive with your approach and “make some hay”. There are also times when playing defense and perhaps gaining exposure to what’s out of favor may make more sense. Rebalancing and diversifying your portfolio would be an example of “fixing the roof”. Need a reminder why you may want to own bonds? Here’s performance for the S&P 500 Index v. the Barclays Aggregate Bond Index during stock price drawdowns this year
iv
:
1/29/18 - 4/2/18: SP500 -9.0%, Barclays Agg -2.0%
9/30/18 - 10/31/18: SP500 -6.8%, Barclays Agg -0.6%
Bonds may not have the upside potential of stocks in a rising interest rate environment, but they can provide a cushion and help temper volatility in your portfolio.
We want you to remain patient with your diversified approach, and we appreciate your confidence in letting us help you strive toward your financial goals.
|
|
Gary Orf, CFA
®
|
Chief Investment Officer | Renaissance Financial
|
|
St. Louis, MO | Omaha, NE | Kansas City, KS | Lincoln, NE | Chicago, IL | Phoenix, AZ
|
|
i
JPMorgan Guide to the Markets, October 1, 2018.
ii
JPMorgan Guide to the Markets, October 1, 2018.
iii
American Funds, Guide to Market Fluctuations, October 2018.
iv
Bloomberg, November 1, 2018.
This material represents an assessment of the market environment at a specific point in time. And is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.
The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Please note an investor cannot invest directly in an index.
The Barclays U.S. Aggregate Bond Index is a broad-based bond index comprised of government, corporate, mortgage and asset-backed issues, rated investment grade or higher, and having at least one year to maturity. Please note an investor cannot invest directly in an index.
Securities and investment advisory services offered through Securian Financial Services, Inc. Member FINRA/SIPC. Renaissance Financial is independently owned and operated.
5700 Oakland Avenue, Suite 400, St. Louis, MO 63110. 2302795 DOFU 11/2018
|
|
|
|
|
|
|