Even the most balanced investors have gotten knocked on their heels this year.
Typically, spreading one’s bets across several different types of investments has helped deliver steadier returns. When U.S. stocks slide, say, bonds and gold can hopefully help offset the losses. Or maybe stocks abroad will hold up better than their U.S. counterparts.
Not so this year. U.S. stocks have endured some breathtaking drops the last several weeks, slicing the S&P 500’s year-to-date return to 2.2 percent after including dividends. But markets in Germany, South Korea, Hong Kong and elsewhere are solidly in the red year to date.
Even worse for investors who carefully built up balanced portfolios to protect themselves from potential downturns: The investments that are supposed to offer safer returns have also struggled at the same time.
It’s a rude reminder that one of the bedrock tenets of investing — don’t keep too much of your portfolio concentrated in any one thing — doesn’t guarantee success by itself. But it’s also important to remember that this year’s struggles have been a relative anomaly.
If conditions hold, this may be only the seventh time in the last 46 years that investors would have lost money if they had divvied up their portfolio equally among seven investment groups, including stocks, bonds and commodities, according to the Leuthold Group.
Since 1973, investors would have gotten a 10.2 percent annualized return if they had a portfolio that split evenly each year across commodities, large U.S. stocks, small U.S. stocks, real-estate investment trusts, 10-year Treasurys, gold and foreign developed-market stocks. That’s nearly as big a return as the S&P 500 itself, at 10.4 percent, with significantly less volatility.
“Given this strategy’s required skill (none) and trading frequency (minimal), the results border on the remarkable,” Leuthold’s chief investment officer Doug Ramsey wrote in a recent report.
That’s what makes this year’s widespread pain so much more painful.
Stocks around the world have struggled amid worries about slowing economic growth, the threat of the global trade war and the impact of higher U.S. interest rates. Emerging-market stocks in particular have struggled, and stocks in Shanghai have sunk 24.3 percent in 2018.
Bonds, meanwhile, have been hit by rising interest rates. When rates climb, it makes the smaller interest payments paid by older bonds less attractive, and their prices correspondingly drop. The largest U.S. bond mutual fund, Vanguard’s Total Bond Market index fund, has lost 2.4 percent this year. If it continues to drop, the fund could surpass its 2.7 percent loss in 1994 for its worst performance since it began trading in 1986.
When markets around the world are suddenly shaky, investors often turn to gold for safety. But that, too, has struggled this year, and the GLD exchange-traded fund is down 7.3 percent in 2018. Gold often trades in the opposite direction of the U.S. dollar, and the dollar’s value has climbed against rivals as a result of higher U.S. interest rates.
Given that rising interest rates have contributed to struggles for all kinds of investments this year, it’s tempting to think that the value of diversification will stay diluted as rates rise further. But even during the 1970s and early 1980s, when interest rates were rising, balanced portfolios were still able to deliver mostly positive returns.
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