Asset Allocation is not dead
By Jay L. Gershman
Most investors will open their year end statements and wonder out loud, “I thought the market did better than that”? The short answer is a question, which one? The oldest index, the Dow Jones Industrial (DJIA), earned approximately 10% during 2014. However, most investors now equate “the market” with the S & P 500 index, which earned nearly 13% in 2014. Unfortunately, most investors did not only own stocks that make up the S & P 500 index but have a diversified portfolio that also includes bonds and commodities. To make matters worse, most investors today, diversify further by investing in companies around the world only to see losses in 2014. Lastly, many investors choose to diversify from large blue chip companies by buying mid and small sized companies in hopes of seeing these younger and more nimble companies grow into tomorrows slower growing and more conservative companies. Investors in these smaller companies are often rewarded for the additional risk. Unfortunately, that didn’t happen either in 2014.
In a perfect world, and there are some investors who believe that they live in this my mythical world, an investor could select the one best performing asset class at the beginning of each year and sell it before it changes direction. If that were possible, there would be no need to diversify and spread your risk among many asset classes. Unfortunately, in the real world, the future is not predictable, nor is this year’s winning asset class. In reality, most investors seek the opposite; they diversify in order to avoid having a large portion of their assets in a poor performing asset that can ruin their financial world. Ask anyone who owned all stock (like the S & P 500index) in 2008 and saw a decline of up to 60% of their value if they still believed the old adage “don’t worry, investing is long term”. During that same time from November 2007 to March 2009, bonds and commodities provided a cushion to diversified portfolios that made the horrendous correction bearable.
Since the year 2000, we have seen the same scene play out over and over for investors seeking the one best performer. We saw investors in technology and internet start ups lose approximately 80% in the NASDAQ from 2000-2002 only to cash out of the stock market entirely to buy real estate to sell for a profit. This plan worked for about five years until the financial collapse of 2008. While most assets fell from 2008 to 2009, many real estate investors are still waiting to break even. During the collapse and the years following, many star struck investors bought gold until the price reached $1900 per ounce only to see the price fall to $1400 in April 2013. The price has fallen to under $1200 per ounce today. Today’s latest casualty are investors in oil. Several years ago a frenzy of buying resulted in a $140 per barrel price which fell to $100 and settled there for the past few years as new technologies emerged to discover oil here in the US. As investors were told the price of oil should remain near $100 due to world geopolitical issues, inventories swelled. As we speak, the price of oil has fallen below $50 per barrel and investors in oil lost 45% in 2014. When interest rates rise, will investors afraid of stock who invested primarily in bonds be the next casualty?
Oil, gold, bonds, real estate, small companies and international investments are major components directly or indirectly in our lives and our portfolios. Last year, investing in these assets did not provide a reward in line with investments related to the S & P 500 index. However, despite my frustration, I am not throwing out everything that I have learned through hard work and prior experience, that a diversified portfolio delivers the most optimum returns on a risk adjusted basis over long periods of time. In a world constantly filled with unpredictable surprises and unforeseen investment risks that affect our nest eggs in one way or another, I’ll stick with the least technical basic adage; “don’t put all of your eggs in one basket”.
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Jay Gershman is an Accredited Investment Fiduciary and Registered Life Planner. This information is the opinion of the author and not intended as specific recommendation. Please consult a professional before making changes. Securities offered through Securities Service Network, Inc. Member: FINRA/SIPC. Advisory Services offered through SSN Advisory, Inc. Registered Investment Advisor.