If you have been holding a diversified portfolio, it's been a frustrating few years. Nothing outside of US stocks has been working. We have been counseling clients that sticking with their original plan of global diversification still makes a lot of sense since the tides will turn eventually. We may be seeing those shifts sooner than we thought. Below is a chart of showing the first month of the year:
Although a short time period, things have shifted in 2015. After a month, the US stock market (black line) is the clear loser when compared to the developed foreign markets (gold line) and the emerging markets (blue line). For the past five years, US stocks have gone up over 15% per year, while foreign developed stocks are up 5% and emerging market stocks are up 2% per year. It is not hard to understand why people might abandon diversification and just decide to stick with the US markets. The problem is that trends don't last forever. At some point the tides will change. This is not dissimilar from the 1990s. This decade was a great period for the US stock market with substantial economic growth ending with the technology boom. The US stock market had tremendous gains and outperformed almost every other asset class. Those choosing to concentrate their assets in large US companies at the end of this decade, because of that great performance, found that the next 10 years were horrific (taken from the Irrelevant Investor Blog):
Investors need to remember that if you are properly diversified, there two truths that you ALWAYS have to live with:
- You will always have something to complain about- something in your portfolio will be out of favor every year if you are properly diversified.
- You will never outperform the best asset class- in fact your portfolio will always fall somewhere in the middle of the asset classes you are invested in. In the case of 2014, if you have adopted a diversified portfolio, you should be upset you underperformed the S&P 500. It was one of the best performers
The upside of all of this is that your portfolio will never be as bad as the worst asset class in the portfolio, you don't have to try to "guess" which asset class to rotate into each year, and your returns will be much less volatile. We believe that this is a worthwhile tradeoff.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.