Don’t Put All Your Investments in One Basket (06/2016)

Summary: Last year's poor performers in the markets, such as gold and high-yield bonds, have turned around as diversification proves to be the one free lunch for investors. The Barclays Global Aggregate Bond Index is up 6% due to a reversal in the strength of the US dollar, while gold has rallied to $1,215. It remains to be seen whether this year's rally is a new bull market or a bear-market bounce, but with a presidential election and a Federal Reserve focused on raising the Fed Funds Rate, things should get interesting.

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.

 *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

I’ve held an industry securities registration for 30+ years and am subject to SEC and FINRA oversight.

Most clients pay fee-only or an hourly rate. The size and complexity of the client’s wealth management and financial and retirement planning determine that fee.

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Tim has offices in Boston and South Dartmouth, Massachusetts. He’s licensed to handle securities in 8 states: Massachusetts, Rhode Island, New Hampshire, New York, New Jersey, Connecticut, Maine, and Florida.

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