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First Quarter 2017 Investment Commentary - A Lesson in Diversification


In our January letter we looked back on the years since the 2008 financial crisis and the strong returns of US Large Cap stocks compared to other asset classes. We advised you that holding a diversified portfolio with exposure to international stocks as well as bonds and other asset classes still made sense in spite of the strong returns in US stocks during this time. The first quarter investment results back up our belief in diversification. While US stocks outperformed international stocks in six out of seven years from 2010 to 2016, we've seen things turn around so far this year.

The top performing asset class in the first quarter was emerging market international stocks, which returned 11.5%, followed by developed market international stocks at 7.4%. Large cap US stocks weren't far behind with a 6.1% return so this wasn't a drastic reversal of fortunes, but it did emphasize the unpredictable nature of asset class returns. US small cap stocks, which had some of the strongest returns of all asset classes in 2016 at 21%, returned only 2.5% in the first quarter. Fixed income was generally in the 1% return range while commodities dropped back to the bottom of the return numbers with a 2% loss.

In addition to the lesson on diversification, 2017 has also taught us the importance of having a long-term perspective when looking at your portfolio. There has been a nonstop deluge of news coming out of the White House since President Trump took office and every bit of news can have an impact on the markets. A single tweet from the President can send a company's stock price plunging. Even showing support for the President can hurt a company's stock price, as Under Armour found out earlier this year. Every time the administration changes their stance on an issue it sends ripples through the markets as people overreact to every piece of news. 

This is not something that is new to this administration. The stock market has always been driven by emotion in the short term and human beings don't always react to news in rational ways. This is exactly why we preach the importance of taking a long-term perspective when looking at your investment portfolio. While emotions drive short term volatility in the markets, the underlying businesses drive long term returns. 

We won't try to predict what will happen in the coming months. Not long ago it looked like tax reform was a good bet to be passed this year but that's looking less and less likely every day. Increased tensions with Russia over our bombing of Syria and the aggression shown by North Korea are certainly causes for concern. We don't know what will happen next but we do know something will happen that will impact the markets. Our job is to help you see through that and not overreact to it. Having a diversified portfolio and a long-term perspective makes that much easier.

The views expressed represent the opinions of L.K. Benson & Company and are subject to change.  These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.

Please see Additional Disclosures more information.