Portfolio Strategy Review 2015

by | Jan 27, 2016 | Portfolio Strategy

Asset Allocation & Diversification Didn’t Work in 2015

In 2015, and thus far in 2016, performance isn’t good. All asset classes turned in weak numbers. Oil, commodities, and emerging markets continued a second year of underperformance fueled by concerns of a Chinese slowdown and a stronger US dollar. According to Bloomberg, median asset allocation ETF strategies were down over 5%; mighty Apple fell over 30% from July through December; Berkshire Hathaway was down over 12% for the year;  490 of the S&P 500 companies were down 3.5% on average. All in all it was among the 5 worst years on record for asset allocation strategies as depicted in the table below.

Portfolio Strategy & Considerations

As indicated above, nothing worked very well in 2015. Our discipline, diversified asset allocation, tends to lessen variation over time within a portfolio and deliver better returns after accounting for risk.  This is because different assets and regions respond to economic factors differently – usually. International markets, Asia and Emerging Markets in particular, have underperformed. As seen in the two tables below, performance patterns may persist for short time periods. Over the past three years US markets have outperformed other regions; over longer time periods that isn’t the case.

The table below illustrates that the annual differences between markets and asset classes can vary dramatically.

The next table below shows a longer-term perspective. The 15 year period shows MSCI Pacific and MSCI Emerging Markets have outperformed other stock markets in spite of poor performance over the last 1, 3, and 5 years. The table also illustrates that as time goes on, the variation tends to lessen across regions and asset classes.

The table below further illustrates a recurring theme in financial markets: trends reverse over long time frames. The top performing region or asset class doesn’t stay on top forever. Trying to predict when these trends will reverse is an exercise in futility. The 1970’s saw rampant inflation, hence commodities performed very well; the 1980’s Japan was on the verge of ruling the world; the 1990’s the US “new economy” boom turned to bust and in the 2000-09 period the US had negative returns, while fear grew about China’s growing clout. Today, the China fears have greatly diminished! Forecaster’s attempts to predict the future make headlines and frenzy, yet seldom provide consistent insight into future returns. That’s why we diversify your assets. It lessens market risk because we don’t try to time these trend reversals. Indeed, various studies show how those who try to time the market lag by a wide margin. Instead, we rebalance the portfolio as markets gyrate to keep consistent with your goals.

The Economic Case for Diversification and Foreign Market Investment

According to Dimensional Fund advisors, the US percent share of the global stock market is between 45%-50%, in spite of only having about 27% of total economic output. As the table below shows, Asia has 44% of global economic output, and has made strong and steady economic gains against the Americas and Europe since 1962; it’s very likely this trend will continue; it’s also likely that their stock markets will eventually reflect their growing importance to world markets. That’s why we own foreign stocks.

The Planning Case for Diversification by Asset Classes and Income Streams

This last table below shows different assets and how their performance typically varies depending upon economic conditions. Given the performance of stocks, bonds, and commodities, one might surmise we are headed for a recession. Economic data is mixed: US job growth remains steady, if unspectacular. Wage gains have been meager. Credit is tightening, although real estate is still holding up well. The Fed may raise rates further!?! Economic cycles come and go; factors that drive cycles are a complex mix of geopolitical, fiscal, and monetary policies. An often quoted phrase is that the “stock market has predicted 7 of the last 3 recessions.” Today, it’s not clear if we are moving toward a recession, or if we are experiencing a normal pullback after 6 years of steady economic growth and very strong US market returns. For planning purposes, it’s prudent to have an appropriate asset mix to accommodate growth, stability, and income.


During times of market turbulence, it’s important to keep perspective and keep discipline. The asset allocation discipline is contrary because it forces one to sell good performing assets and buy poor performing assets – buy low, sell high. Sometimes easier said than done when the primary human emotions that drive market behavior – fear and greed are omnipresent. It’s good to keep in mind that we’ve established your asset mix based on your risk appetite and your time horizon. To lessen emotion, the discipline in our asset allocation, cost containment, and tax efficiency will greatly improve the odds of achieving your goals.

PLEASE NOTE: You can’t invest directly in an index. Past performance does not guarantee future performance. All investments are subject to risk, including possible loss of the money you invest. Diversification does not guarantee profit or protect against a loss. Nothing herein or elsewhere on this site constitutes investment, legal, or tax advice. For details please see Disclosure.


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