Examining A Year Of Weak Returns For Diversified Portfolios

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November 9, 2015 4:08pm NYSE:AOR NYSE:RSP

etfsDavid Fabian:  2015 will be over before we know it and despite a great deal of jostling in the stock and bond markets, the net effect has been very little real gains for diversified portfolios.  A look at a typical 60/40 mix of stocks and bonds in the iShares Growth Allocation ETF (NYSEARCA:AOR) 


is currently sitting at a total return of just 0.33% this year.  Not the worst outcome and there is a little bit of time left to improve on that number, but certainly nothing to write home about.

This balanced mix of stocks and bonds is a very common asset allocation structure in the investment world.  You find it in everything from multi-billion dollar endowments to hedge funds, retirement plans, and individual investor portfolios.  Everyone loves to quote the percentage gain in the S&P 500 Index, but at the end of the day, most realistic portfolios are closer in alignment to a mix of multiple asset classes.  The goal of this diversification is to reduce the overall risk profile (or draw down) of the capital invested.

The last time AOR achieved such meager results was 2011, when it posted a gain of just 1.16%.  Nevertheless, that was followed by a gain of 11.36% in 2012, 15.92% in 2013, and 6.22% in 2014.

There is hope for the future, BUT the continual sector rotation carousel seems to be creating a lack of cohesive growth in stocks.  When you couple that with the real threat of rising interest rates weighing on bond prices, you have a recipe for weakening gains and overall frustration across the investment landscape.

There are individual publicly traded companies that have achieved phenomenal growth this year.  For example, Amazon Inc (AMZN) and Netflix (NFLX) have more that doubled their share prices in 2015.  However, those success stories are isolated anomalies in the broader context of the U.S. stock market.  Counteracting those high flying headliners are disasters like the 30% drop in Wal-Mart Stores Inc (WMT) and 40% decline in Alcoa Inc (AA), just to name a few.

Simply put, the tug of war between individual company performance has created a bifurcated sector map that has seen little net growth in most broad-based equity indices.  To further illustrate this point, the Guggenheim S&P 500 Equal Weight ETF (NYSEARCA:RSP) is virtually flat in 2015.

This type of environment may favor sector-specific strategies or niche portfolios with oversize exposure to high momentum areas of the market.  However, those same groups often come with a higher associated risk of being in the wrong place at the wrong time as strength transitions to fresh names.

Trust In The Process

During periods of lackluster returns, its easy to lose faith in your investment strategy or start to get antsy to make changes.  We live in a society of instant gratification and are bombarded with information at a tremendous pace.  Sometimes its like trying to drink from a fire hose.

You want to jump on the Netflix’s of the world to try and capture that same lightning in a bottle that led to triple digit gains.  However, that emotional response should be tempered with the knowledge that there will always be lost opportunity in the stock market.  It’s just the nature of the game.

It’s more important to stay focused on your individual risk tolerance and process than trying to step outside those boundaries and suffering the consequences of an ill-timed trade.  A sound investment strategy takes time, tools, and discipline to implement properly and years like 2015 can test your resolve.

No matter what your style might be, you should evaluate your performance based on your ability to stick with your plan rather than the results of any particular year.  That will lead to quality self-examination and the ability to make careful adjustments when needed to improve your returns or lower your risk.

This article is brought to you courtesy of David Fabian.


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