2014 has been a fascinating year! We’ve seen headlines throughout the year that took our breath away. From tragedies like the Ebola epidemic and ISIS to the Russian invasion of Ukraine and continued unrest in Israel, our world has seen some terrible events! We’ve endured a year of mid-term election campaigning that saw the Republicans take the Senate and retain the House. We’ve even seen the resurgence of football in the state of Mississippi with both teams in the Top 10! Needless to say, it has been a year of ups and downs!
With all the headlines mentioned, one would think the markets would be all over the place, however, that was not the case in 2014. In fact, some have even said that 2014 was a boring year in the market, with some investors saying they were frustrated. With that being said, the fact that it was boring at times did not bother us at all! 2008- 2012 was about as much fun, angst, and worry to last a lifetime. 2013 was a rollercoaster starting with the fiscal cliff and peaking with market records. So while we are completely ok with a “boring” year, let’s take a look at why some investors are frustrated.
First on a positive note, in the US economy, private nonresidential fixed investments held steady year over year, fixed assets have grown slightly, and employment has grown steadily. US corporate profits have grown, margins are steady, and corporate debts ratios have gone down. This is according to JP Morgan’s market insights charts. Oil production in the US is up and oil prices are down. All of this supports a growing US economy. Of course, none of this predicts the future for neither the economy nor the financial markets. Yet, we like what we are seeing today.
So, why are some “frustrated” with the markets? Notice the attached chart. This is an asset class returns chart published by JP Morgan. This chart shows historical returns for US stock, bonds, real estate, commodities, international developed and emerging markets. Also, notice the white box titled “Asset Allocation.” This category demonstrates an investment mix ratio that is approximately 65/35 growth investments to fixed income investments that is made up of all the investments on this chart. One could say that this is a traditional or standard portfolio mix. Next, notice the returns of this “white box”. One can see that these have traditionally been in the middle of the mix of returns producing a relatively steady return for the last decade.
The S&P 500 (the green box), which is an all-stock benchmark, driven mainly by its large cap stocks. The S&P 500 has performed fairly well for the last 10 years, with 2008 as a major exception. Now, the question that an investor should ask is, can they stand the risk of an all-stock portfolio? Most retirees and near retirees cannot.
The Barclays Bond Aggregate is the orange box and is typically to be more conservative in its return. Notice in ’08 this benchmark was in positive territory. A mixture of the S&P 500 and the Barclays Aggregate is often a standard benchmark for an Asset Allocation portfolio. While this may not tell the full story, it is an industry standard.
So, again, why the frustration? Year to date in 2014 both the S&P 500 and the Barclays Bond Aggregate has had a greater return than the Asset Allocation portfolio. This may test the theory this year involving the standard school of thought involving being properly diversified or be in the proper risk category.
So we are left with the question of, “should an investor change his risk category?” Should an investor at retirement or near retirement move away from Asset Allocation, move away from diversity, and chase these returns? The answer is a resounding “No!” In the previous 10 years only in 2011 did the S&P 500 and the US Barclays Bond Aggregate both have a greater return than the Asset Allocation category. Also, an investor should never take more risk than they are comfortable with to chase returns. Investment risk is the chance that an investment’s actual return will be different, or lower, than expected. As an investor nears retirement they lose their most important commodity, time. When we have less time, we must mitigate the risk to account for this declining commodity.
The idea of Asset Allocation with the proper risk score is that a portfolio is diversified over multiple asset classes, with the proper mix of growth investments and fixed income investments to meet an investor’s desired risk. The goal is for those investments to grow over time in a way that is a “smoother ride” than the alternative of investing in all growth stocks. This is our goal for our clients’ accounts. Notice the “white box” provides that “smooth ride” for the previous 10 years. Of course, that does not guarantee the next 10 years. However, proper investing is often spent researching the past to position ourselves for the future.
We appreciate the opportunity that our clients give us to do this for you. We never take that trust lightly. We look forward to a great 2015 in which we can continue to help our clients Navigate Retirement!
Investment advisory services offered through Sound Financial Strategies Group, Inc.("SFSG"), a Registered Investment Adviser. Securities offered through Comprehensive Asset Management and Servicing, Inc., ("CAMAS") Member FINRA/SIPC. SFSG and CAMAS are separate and unrelated companies. The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by CAMAS.
Posted on Mon, December 22, 2014
by Sound Financial Strategies Group