The first quarter of 2015 proved to be one where the benefits of a diversified portfolio flexed its considerable muscle. Following 2014, where many asset classes trailed the U.S. Large Cap stock market, the first quarter of 2015 showed a change in leadership (according to return) among asset classes. The Standard & Poor’s 500 Index, the darling of many return-chasing investors, increased just 0.95 percent in the first quarter, disappointing when compared to other stock indexes that performed significantly better (see chart below). For instance, U.S. Small Caps, as measured by the Russell 2000, were up 4.32 percent, while International Developed Markets as measured by the MSCI EAFE Index were up 4.88 percent. Even bonds outperformed U.S. Large Cap stocks in the first quarter of 2015, posting a positive 1.61 percent return measured by the Barclays U.S. Aggregate Bond Index.
Forecasters often say that 8 percent to 10 percent is a likely outcome for long-term U.S. stock market performance. History has shown this to be the case. As sensible as this may sound, it is worth pointing out that over the last 89 years, the S&P 500 Index has never returned between 8 percent and 10 percent in any single calendar year. In every case it has been higher or lower, often by a substantial amount. For example, starting in 1926, there have been 28 years with a gain or a loss in excess of 25 percent. Given this, one would do well to expect the unexpected every year.
Over the last few years, realizing returns from a diversified portfolio has been challenging in many respects, but perhaps the biggest challenge was resisting the urge to dip and dart between asset classes to chase the best performing stocks.
We often remind our clients that a successful investment experience is not predicated on owning only the best performing stock or index each year. If you are properly diversified, you will no doubt—at any moment in time—love one piece of your portfolio and hate another. Embarking on this journey requires the acknowledgement that you give up the opportunity to make a killing, in order not to get killed.