Diversification and Investment Portfolio Design
Diversification and rebalancing are crucial for those investors who are approaching retirement when they will be using the money.
Soon 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. They are 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.
Read more: Financial Planning for Retirees
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 U.S. and Canada, is up 12%. The MSCI Emerging Market Index is up 12%.
As of May 2019, the price of gold at $1282 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 puts your asset allocation and its risk level back to the original 60/40.
Read more: Investing in Foreign Stocks and Bonds
Retirement accounts are ideal for rebalancing, 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.
Read more: Independent Investment Advisor
Nobody knows for sure what the rest of the year will bring, as the adage goes, past performance is not indicative of future results. However, I think the scare that interest rates will continue rising is probably over.
Read more: Q/A Financial Advisor Tim Hayes
*Diversification, rebalancing, and asset allocation strategies do not assure a profit or protect against loss.
2019 Results as of 05-01-2019Comparison of Returns of Different Asset Classes (Investors cannot directly invest in an index)
|Asset Class||Total Return||2018 Return|
|Barclays Global Aggregate Bond Index||1.76%||-1.31%|
|S&P High Yield Corporate Index||8.55%||-2.17%|
|The Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS)||3.5%||-1.42%|
|Barclays Aggregate Bond Index||2.97%||0.05%|
|The MSCI Emerging Market Index + China||11.75%||-14.57%|
|MSCI EAFE Index||11.72%||-13.79%|
|S&P 500 Index||18.21%||-4.52%|
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 upon as individualized investment advice.
More About Tim
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