Tuesday, January 7, 2014
January 2, 2014
I am not going to spend a lot of time recapping the big stories in 2013 or talking about their impact on the markets. I believe I address these topics during each of my regular Market Updates over the course of the year, so I intend to focus on lessons learned and what, if anything, we should take away from 2013 as we look ahead to 2014.
#2. Allegiance to simple asset allocation for allocation’s sake can be costly—also known as doing nothing. The bond market, as measured by the Barclays US Aggregate Bond index, was down 2.2% and significantly underperformed stocks. Many financial experts suggest that it is appropriate to adhere to a sizeable bond portfolio simply because that is what has become the norm. I share the belief that owning bonds is appropriate when an investor’s cash needs warrant a steady stream of interest payments, or their risk tolerance is such that they simply cannot stomach the typical volatility in the stock market. However, in years like 2013, owning bonds just because it has become an industry standard, cost investors dearly. If you look at the total return of a typical 60/40 portfolio of stocks and bonds, the return for 2013 comes in around 18.6%. A good return, but well below the potential returns offered by a more stock-heavy portfolio.
#3. It is important to pay attention to sector investments. Being able to identify and rotate in and out of the major economic sectors is important not only in stock portfolios but bond portfolios as well. The difference between being invested in the best performing stock sector (Consumer Discretionary) and the worse (Real Estate) was over 41% this past year. Focusing on the strongest sectors and avoiding the weakest proved a profitable strategy in 2013. Bonds are really no different. Morningstar® has 15 different bond sectors it follows. The best performing sector (High Yield) outperformed the weakest (Long Government) by 20.2%.
#5. US stocks remain favored. Current conditions favor US stocks over all of the other major asset classes I follow. I am overweighting my stock allocation to US stocks going into 2014. Small capitalization stocks are currently favored, however, large cap stocks continue their recent outperformance and this is a trend I have been watching closely for the last month or so.
#6. International stocks remain in the favored #2 status among the six major asset classes. I believe there is more uncertainty surrounding international markets than there is the US at this time, but this asset class has shown strength. Developed markets are clearly favored over Emerging markets. I have heard the repeated mantra in the financial media that Emerging markets is the place to be, and that may eventually prove to be true; however, now is not that time. Stay focused on the strongest developed countries.
#7. Volatility remains subdued, but that can change quickly. This observation is based upon historical data. 2013 will go down as one of the least volatile markets in recent memory. During the course of 2013 there were no 10% or greater corrections and only one correction greater than 5% (7.5% between May 22nd and June 24th). Since this bull market began in March 2009 until the end of 2012, there have been an average of one 5% or greater correction every 4.6 months (3.8 times per year) and a 10% or greater correction once every two years. The last large correction ended September 3, 2011 marking a two-year four-month time span since the last major correction. Statistically, we are certainly due for a large correction and we should expect smaller corrections along the way. Markets never travel upward in a straight line.
#9. Expect political rhetoric to be even more shrill than 2013. I happen to believe this observation is a total no-brainer. Mid-term elections for Congress will occur in November. There is a lot at stake for both parties so I expect the media noise will be deafening and it may be easy for sound decision making to get lost in this media onslaught (refer back to #1). Stay focused on what the market data is saying.
Investing is not easy and it really never has been. Hindsight can remove many of the memories about the uncertainty surrounding past decision making and can mask the stress investors might have felt at the time, but for investors this remains a tough business. I believe this is why so many people will not open statements or why they rarely make changes in their 401(k) plans. They simply don’t know what to do. The good news is that there are more tools available today to help investors than ever before, and if you know how to use them in a systematic way, you will improve your chances of meeting your goals. Helping you navigate the chaos and uncertainty of today’s markets is what I do.
I want to say thank you to my clients who have given me the privilege of helping them meet their financial goals and guiding them through these turbulent and challenging times. I trust all of you have found my Market Update and Commentaries informative and useful. For those who are interested in learning more about how I manage investments and long-term planning, I welcome the opportunity to share with you more of my knowledge and expertise.
I wish each of you a very Happy New Year and a Prosperous 2014.
Paul L. Merritt, MBA, C(k)P®, AIF®, CRPC®
NTrust Wealth Management
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Past performance is not indicative of future results and there is no assurance that any forecasts mentioned in this report will be obtained. Technical analysis is just one form of analysis. You may also want to consider quantitative and fundamental analysis before making any investment decisions.
Information in this update has been obtained from and is based upon sources that NTrust Wealth Management (NTWM) believes to be reliable; however, NTWM does not guarantee its accuracy. All opinions and estimates constitute NTWM's judgment as of the date the update was created and are subject to change without notice. This update is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities must take into account existing public information on such security or any registered prospectus.
The NYCE US Dollar Index is a measure that calculates the value of the US dollar through a basket of six currencies, the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona, and the Swiss franc. The Euro is the predominant currency making up about 57% of the basket.
Posted by Paul Merritt at 12:05 PM