If you extrapolate last year's lessons, diversification could be seen as the biggest threat to a portfolio. Traditional US Large Company Stocks and US Government Bonds sprinted past limping "diversifiers" such as international stocks, non-traditional bonds, and alternative investments. Over history, clients have generally benefited from diversification. But this pillar of investment discipline turned into a headwind last year.
For equity investors, flat domestic returns did not tell the whole story. Consider that the return of the S&P 500 index last year was 2.1% including dividends. US Companies took a roller coaster ride to get back to their starting point - disappointing summer news was eventually overcome by maintained slow growth and exceptional corporate profits.
Source: Morningstar, Inc.
staying the course was a challenging proposition last year. The return landscape was even more challenging for portfolios with exposure to international markets. A natural disaster and nuclear situation in Japan first set things on edge followed by enduring concerns about debt which continues to engulf the Eurozone.
Bonds were king in 2011
with long bonds issued by the US government ruling the roost. Key interest rates found new lows (insert hyperlink to interest rate chart from RJ). This was helpful if you were in the position to refinance your mortgage and was also helpful from a portfolio perspective. However, those investors who anticipate a rate rise in the future and have positioned portfolios to attempt to minimize the risks did not fully participate in the boom for fixed income investments.
Our resident economist,
Angela Palacios, CFP ®, notes that unemployment has continued its downward trend since August and is currently at 8.5% nationally which is the lowest level in more than three years according to the United States Department of Labor, Bureau of labor Statistics. Retail, manufacturing, transportation and health care are a few of the sectors enjoying job growth. Based on initial claims so far this month it also looks like we will see another decline in the rate even though it is normally high in the first two months of the year with temporary holiday workers being laid off. This reduction in unemployment is a lagging indicator of the economy showing the pickup in economic growth even though it may be slow.
Short-term lessons don't always help investors focused on the long-term results. We still believe there are critical benefits to diversification and maintain portfolios with a variety of distinctive asset categories and strategies. Our process-driven investment strategy is also designed to avoid performance-chasing sirens in favor of disciplined investing.
Melissa Joy, CFS
Partner, Director of Investments
Financial Advisor, RJFS
Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that's generally considered representative of the U.S. stock market. The Barclays Capital Aggregate Index measures changes in the fixed-rate debt issues rated investment grade or higher by Moody's Investors Service, Standard & Poor's, or Fitch Investor's Service, in that order. The Aggregate Index is comprised of the Government/Corporate, the Mortgage-Backed Securities and the Asset-Backed Securities indices. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow”, is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Russell 1000: Measures the performance of the 1,000 largest companies in the Russell 3000 Index. MSCI EAFE (Europe, Australasia, Far East): A free-float adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States and Canada. The EAFE consists of the country indices of 21 developed nations. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. Diversification does not assure a profit or protect against loss. Investments related to a specific sector, where companies engage in business related to a particular industry, are subject to fierce competition, the possibility of products and services being subject to rapid obsolescence, and limited diversification. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss, including the loss of all principal.