February 2015 Financial Markets Summary

Our recent quarterly investment webcast’s suggestion that there will be more volatility in the world’s markets in 2015 than there was is 2014 has certainly come true, at least in the first four weeks of the new year.  While we are not seeing the wild swings that occurred in 2008, this January’s volatility is 50% more than we saw in January of 2013 and 2014.  Obviously no one knows if this will continue, but readers can see for themselves the rather dramatic changes in returns at the bottom of this page.  While the S&P 500 ran rings around most world indexes in 2014, the story is quite different so far this year.  We will be the first to admit that one month does not make a trend, but the numbers are certainly thought provoking.  Investors who were upset by the low single-digit returns their portfolio gave them in 2014 may see their diversified approach vindicated in 2015 if the pace continues.  Notice the currently negative numbers for domestic stocks, while other asset classes, with the exception of still-struggling commodities, are mildly positive, or at least not in negative territory for the year to-date.

As we wrote in our last summary, 2014 was a very odd year in terms of global returns.  Just 10 stocks from the S&P 500 Index accounted for more than 40% of the index’s return.  The World Allocation index (U.S. and foreign stocks and bonds and commodities) gained barely 1% for the year.  That is the only diversified index in the list, and its 2014 return illustrates the bizarre year for world markets.  We draw your attention to the column on the far right of the box below.  Notice how close the returns are for many asset classes.  These 10-year numbers include a very volatile three-year period (2007-2009), when many investors bailed and ran.  Compare the 5.7% return for the World Allocation to the 5.3% for the S&P 500.  Not only has a diversified mix out-performed the S&P 500 over the last ten years, but it has done so with considerably less volatility.  In the market meltdown of 2007-early 2009, the S&P 500 lost 53%, while a globally diversified allocation dropped 31%.

If volatility is greater this year, domestic and international dividend-paying stocks, which often retain their values longer than non-dividend stocks, might be appropriate.  Other options include preferred stocks, real estate investment trusts (REITs), and energy pipeline MLPs.  As with any investing strategy, we believe it is wise to spread your dollars around in several places.  Investors must accept the fact that a 10-15% correction in the stock market could begin any day.  It’s a normal occurrence and in our opinion, long overdue.  Know that a bad day for bonds is nothing compared to a bad day for stocks.  Finally, be flexible in your fixed-income investing.  It’s been more than 30 years since we were in a period of rising rates, and there is no consensus on how this will affect bonds, whether short or long maturity.

It is important for investors to determine the volatility they can stomach before changing to a more aggressive allocation. If another major downturn in stocks occurs, and it will, can you handle a short-term portfolio loss of 30-50%? Well-diversified portfolios will under-perform the S&P 500 when only that part of the market is strong but could do as well or better over a longer time period.  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 -3.7% -1.3% 7.5% 5.1%
S&P 500 Index – Large Companies -3.1% -1.2% 11.3% 5.3%
S&P 400 Index – Mid-Size Companies -1.2% 1.2% 8.2% 8.3%
Russell 2000 Index – Small Companies -3.3% -0.7% 3.5% 6.4%
MSCI EAFE Index – Developed Intl. 0.5% -1.6% -4.9% 4.7%
MSCI EM Index – Emerging Markets 0.6% -5.3% -4.6% 5.9%
Short-Term Domestic Bonds 0.5% 0.3% 1.1% 2.9%
Intermediate-Term Domestic Bonds 1.8% 2.1% 5.1% 4.5%
Global Bonds 0.3% -0.9% 1.7% 4.1%
Bloomberg Commodity Index -3.3% -14.3% -17.0% -2.3%
Dow Jones U.S. Real Estate 5.7% 9.4% 27.7% 8.5%
World Allocation Global stocks, bonds, commodities 0.0% -1.3% 1.5% 5.7%


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.