The S&P 500 Index over the last 3 years, 12 months and YTD has provided a very nice return. For the first time, in a long time, domestic large cap stocks have taken a leadership position. Asset classes that throughout the last decade provided diversification and an added boost in return have been lagging the S&P 500. Foreign market exposure, mostly due to the European debt crisis, has weighted down investor returns within balanced portfolios. The average performance for gold & precious metals mutual funds over the last twelve months is a return of negative 17.61%. Yet during the "Lost Decade" (2000-2009) the average performance was a total gain of 512%. My point? Many of the asset classes that once helped a portfolio achieve alpha vs. the S&p 500 Index, are currently not providing that extra push.
So what is your next move? Historical mutual fund inflow/outflow data suggests that investors next move will be to chase the hot return of the S&P 500 Index. Investing in a manner that will reduce (drive down beta) volatility versus the equity markets, will many times mean that you will lag the equity markets when they are moving steadily higher. Investors need to start understanding that the upside can come with a downside.
Many retirees own a variation of my 50/50 defensive growth model. If I were to own that model for myself, which I do not because of my age, then I would want the S&P 500 Index to destroy my performance every single year. If that is occurring that means everyone is making money, and that is a good thing. If your 50/50 model is consistantly beating the index, then that will generally mean that the overall markets are not doing very well, ie. The "Lost Decade". I think my 50/50 defensive growth ETF model is up about 7% over the last 12 months. That is a rate of return that many find acceptable, and not too bad considering the model trades at about a .5 beta to the S&P 500.
Raise your hand if your crystal ball works. Yeah mine doesn't either. Investors need to understand what they own and why they own it. What is your portfolio designed to do? If you can correctly answer that question then you can clearly understand your current returns. Instead of complaining about asset classes in your models that are holding you back at this time, use rebalancing tools to take advantage of this disparity. I never abandoned my domestic large cap allocation during the last decade. Instead I used gains that were locked in via rebalancing, ie. from my gold &precious metals fund, to continue to buy domestic large caps when they were out of favor. I warned in my book that every advisor was selling gold & precious metals funds to clients based on past returns. How has that worked out? If you are constantly shifting to what is hot without a real plan, then there will always be somebody eager to sell you that product.
Stop chasing returns and enjoy the ride.
Thank you. Good luck everyone!
Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”
www.allocationforlife.com
