The S&P 500 gained 13.7% this year and the Dow gained 10.0%. Both of these stock market indexes are widely quoted benchmarks for stock market returns – and appropriately so. To be more precise though, both of these benchmarks are US large cap stock indexes. Virtually all other segments of the market fared worse. Small cap stocks, for example, gained just 4.9% this year and international stocks fell 3.0%. The worst place to be was in commodities as oil prices were cut in half over the second half of 2014. They sank 17% for the year. The total bond market, while up 6.0%, paled in comparison to large cap US stocks.
Your portfolio is diversified among large, mid, and small companies as well as international markets. Most of our client’s portfolios contain some allocation to bonds and a few hold commodities. By diversifying among these different categories we seek to minimize the highs and lows that a portfolio can experience – and it gives us an opportunity to “rebalance” into those segments of the market that are down. We are doing this now with international stocks.
In 2014, however, a portfolio limited to large US stocks would have fared much better so we understand those that may question the merit of our more diversified strategy
This article at CNBC.com does a good job of describing the situation and explaining why virtually any diversified strategy did not outpace the S&P 500 this year. It reinforces the longer term nature of stock investing and the importance of diversification.
The longer you’ve worked with us the more clearly you’ve seen the benefit of diversification – as small cap stocks, for example, far outpaced large cap stocks in 2013. We are not market timers and we know that any investment strategy will have periods of under and over performance. We have every expectation that our diversification strategy will be back in favor again – and hopefully sooner rather than later!
Index Performance Dec. QTR YTD
US Stock (Russell 3000) -0.00% 5.24% 12.56%
Foreign Stock (FTSE AW ex US) -3.48% -3.65% -3.04%
Total US Bond Mkt. (BarCap Aggregate) 0.09% 1.79% 5.97%
Short US Gov. Bonds (BarCap Gov 1-5 Yr) -0.31% 0.45% 1.18%
Municipal Bonds (BarCap 1-10yr Muni) 0.03% 0.57% 4.66%
Cash (ML 3Month T-Bill) 0.00% 0.00% 0.03%
About
Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services. We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets. Visit us at www.raffawealth.com