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Diversification and Rebalancing: A Retirement Saver’s Best Friend

Diversification and Rebalancing Your Portfolio

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.

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.

Read More: Financial Planning for Retirement

2020 Results as of 12-30-2020

Comparison of Returns of Different Asset Classes (Investors cannot directly invest in an index)
Asset Class2020 Results2019 Results
Barclays Global Aggregate Bond Index9.24%6.84%
S&P High Yield Corporate Index6.72%14.47%
The Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS)10.6%8.43%
Barclays Aggregate Bond Index7.3%8.72%
The MSCI Emerging Market Index15.64%17%
MSCI EAFE Index6.11%25%
S&P 500 Index15.50%29%
Diversification & Rebalancing: A Retirement Saver’s Best Friend
Diversification and Rebalancing Your Portfolio

1. Diversification and Rebalancing: A Retirement Saver’s Best Friend 12-31-2019

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.

Read More: Wealth Management

Reviewing Your Accounts Do’s and Don’ts

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.

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%. In addition, 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.

Diversification and Rebalancing  Your Portfolio
Diversification and Rebalancing Your Portfolio

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 you were comfortable with an asset allocation of 60% in stocks and 40% bonds six years ago, 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.

Read More: Financial Planning for Retirement

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 the rest of the year will bring, as the adage goes, past performance is not indicative of future results.

*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.

12-31-2019

Comparison of Returns of Different Asset Classes (Investors cannot directly invest in an index)
Asset ClassReturn as of 12-31-20192018 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%-.05%
The MSCI Emerging Market Index17%-14.57%
MSCI EAFE Index25%-13.79%
S&P 500 Index30.43%-4.52%
Diversification & Rebalancing: A Retirement Saver’s Best Friend (2019 Mid-Year)
Diversification and Rebalancing Your Portfolio

2. Diversification and Rebalancing A Retirement Saver’s Best Friend (6/2019)

As markets are wont to do, last year’s poor performers—gold, high-yield bonds, global bonds—reversed course and are this year’s winners, reaffirming that the one free lunch available to investors is diversification.

Benefiting from a reversal in the strength of the U.S. dollar, the Barclays Global Aggregate Bond Index—which consists of currencies and bonds from all over the world—is up 6%, as the conventional wisdom that rising interest rates in the U.S. would push the dollar higher has yet to materialize.

Gold had fallen from $1,800 an ounce down to $1,104, but it has rallied to $1,215. It would need to go up another 48% to get back to its 2011 high. Time well tell whether this year’s rally is the start of a new bull market or a bear-market bounce.

U.S. bonds have also done well this year. The Barclays Aggregate Bond Index, which consists of treasuries, government-related bonds and corporate bonds, is already up 3.5%. High-yield bonds had it tough last year—but their S&P High Yield Corporate Index reversed course, and they are up 7.87% this year.

Strangely, Treasury Inflation-Protected Securities (TIPS), also a type of bond, are up. The Barclays Capital U.S. Treasury Inflation-Protected Securities Index is up 4.2%, though what it is designed to protect against inflation remains tame.

Stocks have been up and down. After a rocky start, the S&P 500 is flat for the year. However, the MSCI Index, which represents large- and mid-cap stocks across 21 developed countries excluding the US and Canada, is down 4%.

The MSCI Emerging Market Index is up a modest 1%. Its performance has been hurt by the sluggish Chinese economy, as many worry that a debt bubble may be bursting in China.

We will have to wait and see what the rest of the year brings. As the adage goes, past performance is not indicative of future performance. But with a presidential election like none we have had before, combined with a Federal Reserve bent on raising the Fed Funds Rate, things should get interesting.

n investors will be getting their 2019 mid-year 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.

Reviewing Your Accounts Do’s and Don’ts

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.

2019 Bond Market Returns 

The Barclays Aggregate Bond Index, which consists of treasuries, government-related bonds, and corporate bonds, is already up 2.97%. High-yield bonds (riskier corporate bonds) had a lackluster last year—but the Standard & Poor High Yield Corporate Index reversed course and is up 8.55% this year. Strangely enough, Treasury Inflation-Protected Securities (TIPS) are up. The Barclays Capital U.S. Treasury Inflation-Protected Securities Index is up 3.5%, 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 so far, recovering all the losses from last year’s terrible 4th quarter. The S&P 500 is almost 18%, while the MSCI Index, which represents large and mid-cap stocks across 21 developed countries, excluding the US and Canada, is up 12%. In addition, the MSCI Emerging Market Index is up 12%. 

As of May 2019, the price of gold at $1282 is still below its all-time 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 you were comfortable with an asset allocation of 60% in stocks and 40% bonds six years ago, now, after the doubling of the stock market, that portfolio might be 75% stocks and 25% bonds. Rebalancing 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 the rest of the year will bring. As the adage goes, past performance is not indicative of future results. But I think the scare that interest rates will continue rising is probably over.

 *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.

Results as of 06-09-2016

Comparison of Returns of Different Asset Classes (Investors cannot directly invest in an index)
Asset ClassReturn as of 06-09-20162015 Return
Barclays Global Aggregate Bond Index8.12%-3.50%
S&P High Yield Corporate Index9.27%-2.52%
The Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS)4.46%-1.44%
Barclays Aggregate Bond Index4.18%0.55%
The MSCI Emerging Market Index-2.97%-3.78%
MSCI EAFE Index-1.12%0.39%
S&P 500 Index6%1.20%
Don’t Put All Your Investments in One Basket
Diversification and Rebalancing Your Portfolio

3. Don’t Put All Your Investments in One Basket

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

Benefiting from a reversal in the strength of the U.S. dollar, the Barclays Global Aggregate Bond Index—which consists of currencies and bonds from all over the world—is up 6%, as the conventional wisdom that rising interest rates in the U.S. would push the dollar higher has yet to materialize.

Gold had fallen from $1,800 an ounce down to $1,104, but it has rallied to $1,215. It would need to go up another 48% to get back to its 2011 high. Time will tell whether this year’s rally is the start of a new bull market or a bear-market bounce.

U.S. bonds have also done well this year. The Barclays Aggregate Bond Index, which consists of treasuries, government-related bonds and corporate bonds, is already up 3.5%. High-yield bonds had it tough last year—but the Standard & Poor High Yield Corporate Index reversed course, and is up 7.87% this year.

Strangely enough, Treasury Inflation-Protected Securities (TIPS), also a type of bond, are up. The Barclays Capital U.S. Treasury Inflation-Protected Securities Index is up 4.2%, though what it is designed to protect against inflation remains tame.

Stocks have been up and down. After a rocky start, the S&P 500 is up 4% for the year. However, the MSCI Index, which represents large- and mid-cap stocks across 21 developed countries excluding the US and Canada, is down 2%.

The MSCI Emerging Market Index is up a modest 1%. Its performance has been hurt by the sluggish Chinese stock market, which is down 17%. Many worry that a debt-bubble may be bursting in China.

Rebalancing Your Portfolio

Because the stock market is significantly overvalued at this time, now is a good 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.

For example, if six years ago you were comfortable with a portfolio 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 the portfolio 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. For example, an investor with a portfolio that was 60/40 five years ago and now 75/25 could rebalance to 35% stocks and 65% bonds.

We will have to wait and see what the rest of the year brings. As the adage goes, past performance is not indicative of future results. However, with a presidential election like none we have had before, combined with a Federal Reserve bent on raising the Fed Funds Rate, things should get interesting.

Results as of 06-09-2016

Comparison of Returns of Different Asset Classes (Investors cannot directly invest in an index)
Asset ClassReturn as of 06-09-20162015 Return
Barclays Global Aggregate Bond Index8.12%-3.50%
S&P High Yield Corporate Index9.27%-2.52%
The Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS)4.46%-1.44%
Barclays Aggregate Bond Index4.18%0.55%
The MSCI Emerging Market Index-2.97%-3.78%
MSCI EAFE Index-1.12%0.39%
S&P 500 Index6%1.20%

 *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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