August 2015 Financial Markets Summary

Our clients intuitively understand that they should broadly diversify their investments. Economist Jason Hsu notes “Diversification is the strategy of maximum regret because some part of the investor’s portfolio is always underperforming!” Research Associates says that staying diversified is like trying to get a five year-old to eat broccoli – it’s just plain “yucky” despite all the well-meaning, repeated pleadings of advisors and parents, respectively. PDS Planning employs broad diversification in most portfolios, since we recognize that there is no way to know what sector will win the prize every three, six, or twelve months. While we may tweak the bond holdings to favor short maturities over long maturities, we know the potential volatility of bonds is significantly less than stocks.

Some investors may look at the stock market returns of the last five years and consider selling their defensive holdings. However, this could turn out to be a mistake. The S&P 500 is going into its fourth year without any kind of correction. The bull market has plowed through all kinds of global economic and political scares, but eventually it will succumb to a pullback. While we are cautiously optimistic about things going forward, we know from experience that sticking with a diversified allocation is the best prescription for financial well being.

For the last year, we have suggested the Fed would begin increasing rates in the last quarter of 2015. Recent comments by Fed chair, Janet Yellen, have practically shouted from the rooftops the Fed’s intention to do just that. As before, we believe this will be done in baby steps, probably 0.25% at a time, to test the stock market’s reaction. Whether additional increases will occur in 2015 we cannot guess, but we do think rates could be at least 1% higher than they are now in the next 12-18 months. This will be a boon to savers, who rely on CDs and other short-term investments for income.

International stocks, as measured by the Europe, Australia, and Far East (EAFE) Index, continue to lead the way this year. A stronger U.S. dollar has made imports from Europe and Japan much less expensive, giving international economies a boost. Some commentators suggest that the eurozone (minus Greece, of course) looks similar to how the U.S. economy started moving out of the doldrums in 2010. Japan’s Nikkei Index has gained more than 30% in the last 12 months, France’s CAC is up 22%, and Germany’s DAX 24%. Despite the gloomy headline news, there are hundreds of global companies doing quite well.

Emerging market stocks have been hurt by China’s 20% bear market in the last three months. But even with this loss, Chinese stocks are still 60% higher than one year ago. China’s impact on the world economy is growing. There is concern the country may be unable to sustain the kind of economic growth that will keep pulling other emerging economies along with it. Clearly China is a work in progress that bears monitoring.

Protect the money you might need to take from your portfolio over the next 3-5 years by keeping it in cash, CDs, or short-maturity bonds. And remember that today’s headlines and tomorrow’s reality are seldom the same.

Asset Index Category Category Category Category 10-Year
2015 To-Date 3 Months 2014 Average
Dow Jones Industrials – Large Cos -0.8% -1.9% 7.5% 5.2%
S&P 500 Index – Large Companies  2.2% -0.2% 11.3% 5.5%
S&P 400 Index – Mid-Size Companies 3.5% 0.2% 8.2% 7.6%
Russell 2000 Index – Small Companies 2.8% 1.5% 3.5% 6.2%
MSCI EAFE Index – Developed Intl. 5.9% -1.3% -4.9% 5.1%
MSCI EM Index – Emerging Markets -5.7% -13.9% -4.6% 4.1%
Short-Term Domestic Bonds 0.8% -0.2% 1.1% 2.9%
Multi-Sector Bonds 0.6% -0.6% 5.1% 4.6%
Global Government Bonds -2.3% -2.5% 1.7% 4.0%
Bloomberg Commodity Index -12.0% -11.5% -24.4% -4.1%
Dow Jones U.S. Real Estate -0.6% 0.2% 27.7% 5.7%
World Allocation Global stocks, bonds, commodities 0.5% -2.4.% 1.5% 4.8%


Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment, strategy, or product or any non-investment related content, made reference to directly or indirectly in this newsletter, will be suitable for your individual situation, or prove successful. This material is distributed by PDS Planning, Inc. and is for information purposes only.  Although information has been obtained from and is based upon sources PDS Planning believes to be reliable, we do not guarantee its accuracy.  It is provided with the understanding that no fiduciary relationship exists because of this report.  Opinions expressed in this report are not necessarily the opinions of PDS Planning and are subject to change without notice.  PDS Planning assumes no liability for the interpretation or use of this report. Consultation with a qualified investment advisor is recommended prior to executing any investment strategy. No portion of this publication should be construed as legal or accounting advice.  If you are a client of PDS Planning, please remember to contact PDS Planning, Inc., in writing, if there are any changes in your personal/financial situation or investment objectives.  All rights reserved.