The performance of equity markets in January shows the value in diversification. After posting a strong 2014, the US stock market sank 2.8% to start the new year. International markets, after struggling in 2014, falling 3%, edged up slightly in January.
The future course of the market is unknown, but having an allocation to international equity clearly benefited investors in January. It is our belief, and it has been supported by numerous studies, that having an allocation to international stocks reduces the volatility of a portfolio while maintaining the same expected return. Thus, they provide a smoother ride with the same expected end point as an all US stock portfolio. Investing internationally might not be a positive every year, but we believe in the long run it will help investors.
We recommend maintaining a 35% allocation to international stocks within the overall equity asset class as it allows an investor to maximize the diversification benefit from the allocation. In addition, emphasizing emerging over developed markets within the allocation further diversifies a portfolio given developed markets trend toward a more close correlation to US Stocks over the past two decades.
By being disciplined and maintaining these allocations an investor can benefit when international stocks are in favor and have a more sturdy investment portfolio.
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Index Performance Jan. Trl 1 Yr
US Stock (Russell 3000) -2.78% 12.99%
Foreign Stock (FTSE AW ex US) 0.05% 1.59%
Total US Bond Mkt. (BarCap Aggregate) 2.10% 6.61%
Short US Gov. Bonds (BarCap Gov 1-5 Yr) 0.95% 1.75%
Municipal Bonds (BarCap 1-10yr Muni) 1.40% 4.90%
Cash (ML 3Month T-Bill) 0.00% 0.03%