2013 PERFORMANCE & THE VALUE OF ASSET ALLOCATION

2013 is over and as we begin 2014 it's natural to reflect on the past year.  While many are determining a saving's plan to reach their financial goals I would like to take some time to discuss market performance. 

 

Index2013

S&P 500 +32.39%

MSCI EAFE +22.78%

MSCI Emerging Markets -2.27%

Barclays Bond Aggregate Index -2.02%


While the numbers above just show returns there is a story behind the numbers.  The US domestic stock market was one of the best performers and the international developed markets are recovering nicely but not quite as well as the USA.  Emerging markets struggled, some analysts believed the reason was due to the signs of slowing economic growth (while EMs are slowing, the fundamentals still look attractive).  Lastly, US bonds faired poorly having a negative year which is rare for bonds.  From 1989-2012 the Barclay Bond Agg index has been negative twice (1994: -3%, 1999: -1%).  Some analysts think that bonds suffered when the Fed announced a tapering of quantitative easing, which also points to interest rate rises in the future.  
Overall, the sentiment from investors was positive however some investors look at recent returns and like to make decisions based on 1 year of results.  When speaking to clients/investors I like to remind them of the big picture, the market is very difficult to predict.  There is no single asset class that dominates investment returns year after year, this is why professionals advocate diversification.  The following slide below helps illustrate this point.

The bigger picture takeaway from this is to diversify and be patient.  Don't go chasing returns, often times individual investors earn less because of impatience and their attempt to shift around assets at inopportune times.  Even the "Asset Alloc." portfolio has averaged 7.2% per year for the last 10 years which if you remember the Rule of 72 your assets will double every 10 years with that kind of growth.  
Below illustrates another important lesson for investors, diversification helps reduce risk and in the long run can bolster returns.  The chart below shows how more diversification helped to slightly increase returns while also reducing standard deviation, a measurement of risk in a portfolio.  What is more compelling is the 2.3% that "average investor" returned, this number is lower than inflation and this suggests average investors do a poor job at investing on their own.  There are many theories as to why average investors earn a lower return than inflation but one that is widely accepted is that average investors chase returns.  They view the market in 1 year intervals and end up chasing after assets classes that did well the year before.  As an investor in the market being a contrarian is important, it helps you stay away from overbought asset classes and makes oversold areas look more attractive.   

Ultimately, the two important lessons these slides can teach us are that diversification and patience are key for long term investing.  

Any questions or comments?  I'm always happy to hear your feedback!

DISCLAIMERS:
1. Past performance is not indicative of future results.
2. Diversification does not guarantee profit nor is it guaranteed to protect assets.

SOURCES: 
Callan Periodic Table of Investment Returns- http://www.callan.com/research/download/?file=periodic%2ffree%2f757.pdf
Bond Desk Group- http://www.bonddeskgroup.com/main/market-data/historical-returns/bond-vs-equity-returns
J.P. Morgan Guide to the Markets- https://www.jpmorganfunds.com/cm/Satellite?UserFriendlyURL=diguidetomarkets&pagename=jpmfVanityWrapper&s_kwcid=TC|24516|jp%20morgan%20guide%20to%20the%20markets||S|e|25529440018&gclid=CIjN2_iXlbwCFY1cMgodi1AAzg

Successful investors have to become successful savers first. 

Ty Peterson

Financial Advisor
O: 720-466-3515

D: 720-722-3505

F:  720-398-3504

 

44 Cook St Suite 100

Denver, Co 80206

www.kindredfinancial.com

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor. Member FINRA/SIPC. Kindred Financial and IFG are unaffiliated entities. OSJ Branch: 12671 High Bluff Dr. Suite 200 San Diego, CA 92130

Electronic communications are not necessarily confidential and may not be delivered or received reliably.  Therefore, do not send orders to buy or sell securities or other instructions related to your accounts via e-mail.  The material contained herein is confidential and intended for the addressed recipient.  If you are not the intended recipient for this message, any review, dissemination, distribution or duplication of this email is strictly prohibited.  Please contact the sender immediately if you have received this message in error.

Financial Tip:
Budgets are highly effective to understanding spending behavior, know where your money goes.

Market Performance for 2013:
32.3%  S&P 500
22.7%  MSCI EAFE
 -2.2%  MSCI Emerging Markets
 -2.0%  Barclay Bond Aggregate Index

Data from JP Morgan "Market Insights"
*Year to date as of 12/31/2013

 unsubscribe from this list | update subscription preferences 

Subscribe to our mailing list

* indicates required
Email Format