March 2015 Financial Markets Summary

A recent CNBC commentary suggested that if your portfolio was up big in 2014, you should fire your financial advisor.  The reasoning behind this is that since only a few large domestic stocks accounted for most of the gains last year, a big return meant that you had no downside protection and diversification.  But wait, isn’t this contrary to what you might think?  The truth is that an advisor acting as a fiduciary should have the client’s tolerance for loss as a priority, ahead of any short-term gains. So a big return in 2014 meant there was no focus on loss prevention. While all investors may have unique risk tolerance and financial goals, there must be some un-correlated assets in the mix to help provide downside protection.  Diversification should be at the heart of almost every investment portfolio to help buffer against losses and reduce the potential disaster of all assets moving together.

Volatility often shows the value of diversification.  2015 has brought much more daily volatility to the world’s markets than was the case last year.  The results of this are evident in the year to-date returns shown at the bottom of the page.  Notice the significant turnaround in international and emerging market stocks.  Are we seeing the start of a trend?  It is probably too early in the year to tell, but the role of diversification is seldom more evident.

You would not be alone if your reaction to the numbers below did not include “Why the heck do I have bonds in my portfolio?”  Given the strong likelihood that the Fed will increase short-term rates later this year, won’t that be a problem for bonds?  Our observation is that because it has been more than thirty years since the last period of rising interest rates, we may be in new territory.  There is much debate about how bonds will be affected by the Fed pushing up short-term rates one-quarter percent at a time.  One thing we do know is that a bad day for bonds is nothing compared to a bad day for stocks.  Bonds are part of a diversified portfolio because they reduce the risk of loss in a bear market for stocks.

And then there is that pesky thing called a correction.  This can happen at any time, and stocks could lose 10-15% of their values in a very short time.  We are long overdue for a correction in the stock market, the last one being almost three years ago.  From our view, this is just one more reason to maintain a diversified portfolio.  Our expectation is that 2015 should be a decent year for investors.  But we caution that expectation with the realization that today’s 24/7 broadcast news channels continue to raise fear and doubt to high levels.  What might be a truly small event somewhere on the other side of the world might precipitate something on a much larger scale. The correction we expect might become a sell-off.  So we always temper our ‘glass half-full’ outlook with what we believe is a prudent approach: spread the risk around, and don’t be greedy.

We know from the numbers below that 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 1.7% 1.7% 7.5% 5.4%
S&P 500 Index – Large Companies 2.2% 1.8% 11.3% 5.7%
S&P 400 Index – Mid-Size Companies 3.7% 4.4% 8.2% 8.4%
Russell 2000 Index – Small Companies 2.4% 5.1% 3.5% 6.9%
MSCI EAFE Index – Developed Intl. 6.5% 2.8% -4.9% 4.8%
MSCI EM Index – Emerging Markets 3.6% -1.5% -4.6% 5.3%
Short-Term Domestic Bonds 0.6% 0.2% 1.1% 3.0%
Multi-Sector Bonds 1.6% 2.1% 5.1% 5.8%
Global Bonds 0.2% -0.7% 1.7% 4.1%
Bloomberg Commodity Index -0.8% -8.4% -17.0% -2.7%
Dow Jones U.S. Real Estate 3.1% 3.9% 27.7% 7.9%
World Allocation Global stocks, bonds, commodities 2.9% 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.