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Diversification and Investment Portfolio Design

Financial Advisor Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®

Reviewing Your Accounts Do’s and Dont’s

Diversification is the proverbial don’t put all your eggs in one basket. So, within an asset class like bonds, a diversified investor owns treasury bonds, corporate bonds, high-yield bonds, and international bonds, benefiting from the fluctuations from year to year in returns.

Soon investors will be getting their 2019 year-end 401(k), 403(b) or IRA performance reports. As markets are wont to do, last year’s poor performers—stocks, high-yield bonds, longer-term bonds—reversed course and are this year’s winners, reaffirming that the one free lunch available to investors is diversification.

2019 Bond Market Returns

The Barclays Aggregate Bond Index, which consists of treasuries, government-related bonds, and corporate bonds, was up 8.72%. High-yield bonds (riskier corporate bonds) had a lackluster last year—but the Standard & Poor High Yield Corporate Index reversed course and was up 14.47% this year. Strangely enough, Treasury Inflation Protected Securities (TIPS), are up. The Barclays Capital U.S. Treasury Inflation Protected Securities Index is up 8.43%, even though what it is designed to protect against inflation remains tame.

The Stock Market and Gold Market Returns

U.S. stocks have had a great year recovering all the losses from last year’s terrible 4th quarter. The S&P 500 is almost 30% while the MSCI Index, which represents large and mid-cap stocks across 21 developed countries excluding the US and Canada, is up 25%. The MSCI Emerging Market Index is up 17%.

As of December 2019, the price of gold at $1521 is still below its all-time price high of nearly $2,000 an ounce in September of 2011 as inflation fears wain.

Rebalancing Your Portfolio

Because the stock market is significantly overvalued at this time, now is an excellent time to consider rebalancing your portfolio. By rebalancing instead of selling what has gone down or buying what has gone up, investors remain diversified but go back to their original allocation. So while diversification is about the eggs, asset allocation is about the basket. What percentage of your basket is going to be in stocks and bonds?

For example, if six years ago you were comfortable with an asset allocation of 60% in stocks and 40% bonds, now, after the doubling of the stock market, that portfolio might be 75% stocks and 25% bonds. Rebalancing simply puts your asset allocation and its risk level back to the original 60/40.

Retirement accounts are ideal for re-balancing, because they enable you to buy and sell within the account with no tax consequence, and usually no fee or commission.

Investors approaching retirement who fail to rebalance might unwittingly end up closer to retirement with a riskier portfolio. That is why, when such investors rebalance, they might want to update their targeted allocations.

Nobody knows for sure what this year will bring, as the adage goes, past performance is not indicative of future results.

2019 Results as of 12-31-2019

Comparison of Returns of Different Asset Classes (Investors cannot directly invest in an index)
Asset Class2019 Results2018 Results
Barclays Global Aggregate Bond Index6.84%-1.31%
S&P High Yield Corporate Index14.47%-2.17%
The Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS)8.43%-1.42%
Barclays Aggregate Bond Index8.72%0.05%
The MSCI Emerging Market Index + China17%-14.57%
MSCI EAFE Index25%-13.79%
S&P 500 Index30.43-4.52%

*Diversification, rebalancing, and asset allocation strategies do not assure a profit or protect against loss.

These are the opinions of financial advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice.

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Financial Advisor Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®

 

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