We preach the benefits of diversification on a regular basis. We tell you not to put all your money in one stock or one asset class because nobody knows what will happen in the future. Unfortunately holding a diversified portfolio isn’t always easy. The years since the 2008 financial crisis have highlighted this for everyone. Every year from 2009 through 2016 a diversified portfolio trailed large cap US stocks. In other words, you could have put your whole portfolio in an S&P 500 index fund at the end of 2008 and outperformed a diversified portfolio by a wide margin.
Unfortunately, that would have been an extremely hard thing for anyone to do in 2008, when the S&P 500 lost 37%. Looking back on the seven years leading up to 2008, we saw the flip side to the last eight years as a diversified portfolio beat the S&P 500 in five of those years. Would anyone have had the fortitude to put their entire portfolio in an asset class that had trailed for five out of seven years and just lost 37% of its value in one year? Should anyone do such a thing?
Of course not. This is exactly why we believe so strongly in diversification. There will always be some area of your portfolio that scares you. Maybe the rise in interest rates has you worried about bonds, or the division in our country from the past election scares you about the future of US stocks, or maybe terrorism in other parts of the world puts you on edge about international stocks. But these fears are based on things you cannot control. All these fears could be realized, or maybe none of them will be. Rather than waste your time worrying, minimize those risks by holding a diversified portfolio and spend your time thinking about more important things you can control.
2016 provided even more proof that nobody can predict the future in the financial markets. At one point in February the US Small Cap stock index was down 16% and everyone was predicting a major market meltdown. Yet that same index finished the year as the top performer with a total return of 21%! US Large cap stocks also had another strong year, finishing with a positive 12% return. International stocks had a strong beginning to the year before trailing off in the 4th quarter after the election. Emerging markets still managed an 11% return on the year but developed markets finished just above 1%. The rise in interest rates caused a decline in bond values in the 4th quarter but most still managed to finish the year in positive territory.
The year ahead will be an interesting one as our new President and his administration take control. With a GOP majority in Congress and the House there is a good chance some of the many promises made on the campaign trail could become a reality this year. The economy continues to expand at a slow and steady pace and many experts believe some of the economic policies being discussed could provide a further boost to the expansion. However, we can’t predict what policies will be implemented nor how they will impact the markets. The best advice we can give is to make sure you stay diversified, rebalance if your portfolio has moved away from your target allocations and don’t worry about things that are out of your control.
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.
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