By: Financial Advisor Tim Hayes - posted in: Investing - Last updated Oct 11, 2019

Diversification and Investment Portfolio Design

by | Last updated Oct 11, 2019 | Investing

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.

Read more: The Bond Market Might Be President Trump’s Toughest Opponent

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%.

Read more: It Is Not Your Fault You Retired When the Stock Market is High, and Interest Rates are Low

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 05-01-2019

Comparison of Returns of Different Asset Classes (Investors cannot directly invest in an index)
Asset ClassTotal Return2018 Return
Barclays Global Aggregate Bond Index1.76%-1.31%
S&P High Yield Corporate Index8.55%-2.17%
The Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS)3.5%-1.42%
Barclays Aggregate Bond Index2.97%0.05%
The MSCI Emerging Market Index + China11.75%-14.57%
MSCI EAFE Index11.72%-13.79%
S&P 500 Index18.21%-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

Expert and highly personalized financial planning, retirement planning, and independent investment solutions for individuals, couples, and businesses in Eastern Massachusetts, including Boston and surrounding cities. So when you need an independent financial advisor in Massachusetts - Salem or the North Shore, Hingham, or another town on the South Shore, Andover and the Merrimack Valley, MetroWest including Foxboro, or the Southcoast, Martha's Vineyard, Nantucket, and Newport, Rhode Island in my Dartmouth office.

There is no charge for the initial consultation, and it can be at your home, office, or favorite coffee shop.

About Financial Advisor Tim Hayes

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

Registered with Cambridge Investment Research, Inc., a broker-dealer with over 3,000 Registered Representatives nationwide. Investment Adviser Representative at Cambridge Investment Research Advisors, Inc., a $94B RIA based in Fairfield, IA. I've held an industry securities registration for 26 years and am subject to SEC and FINRA oversight.

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