Diversification and Investment Portfolio Design

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®, CAS®, CES™, CTS™

I hope everyone is healthy and has made it through this part of the virus unscathed. It has been a crazy six months for investors. In March, stocks were down by almost 40%. Since then, US stocks have recovered most of their losses.

Bonds, mainly US Treasuries, have done exceptionally well, benefiting from a fall in interest rates as investors rushed to safe investments.

Gold has hit an eight-year high of $1,779 as speculators have poured into what they hope will provide some protection if the virus causes significant economic dislocations.

To keep the recession from falling into a depression, the Treasury and the Federal Reserve instituted enormous programs. So far, they have helped the stock market recover faster than anyone could have imagined and kept us out of a depression.

However, these programs have caused the deficit to balloon to $3.7 trillion and the Federal Reserve’s balance sheet to top $7 trillion.

It is not clear if the Treasury or the Federal Reserve would have the stomach to drastically increase these programs if the economy faced a significant setback.

Surprisingly, even after all this, the stock market is expensive; we usually do not begin an economic recovery with stock prices close to all-time highs. But this is not a typical recession. Conversely, bonds are a less appealing investment with interest rates dropping.

Are We In Another Financial Bubble?

The one somewhat attractive market is foreign stocks. They have underperformed U.S. stocks for over a decade and have recovered less quickly. If you own some and are frustrated by their underperformance, it might behoove you to keep them. If you do not own any, it may make sense to allocate a slice of your U.S. portfolio to them.

Diversification remains investors’ one free lunch. This is a good time to double-check yours, especially if you were uncomfortable with March’s downturn.

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

2020 Results as of 06-30-2020

Comparison of Returns of Different Asset Classes (Investors cannot directly invest in an index)
Asset Class2020 Results2019 Results
Barclays Global Aggregate Bond Index2.98%6.84%
S&P High Yield Corporate Index-3.72%14.47%
The Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS)6.0%8.43%
Barclays Aggregate Bond Index6.3%8.72%
The MSCI Emerging Market Index-10.7317%
MSCI EAFE Index-12.5925%
S&P 500 Index-4.0%30.43

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

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