Diversification
Given the fact that the equity markets have rebounded from the latest Brexit Induced pullback to at or near alltime highs, it is easy to eschew the benefits of diversification in one’s portfolio. However, we believe that investors do so at their own risk.
We believe in diversification. Too much is made in the investment world of the “BIG CALL”. Investment gurus celebrate the hedge fund managers who made killings shorting the mortgage market in 2008 or those nailing the “dot.com” bubble of the late 1990s. When those same managers miss markets and moves, oftentimes it is ignored. The triumphs and follies have little to do with the average investor planning for retirement or saving for a vacation house or child’s education.
At the present time, we believe that bonds will provide lackluster returns over the coming two to three years. Yes, the bull market in bonds that started during the early 1980’s when then Fed Chairman Paul Volcker began to choke off inflation, is over. That said, we nonetheless still think that bonds should maintain a place in many investors’ portfolios. With our negative outlook on bonds relative to stocks (however, we do believe that bonds will outperform cash over the coming 2-3 years) why would we own ANY bonds? Our answer is twofold.
One, bonds seem to be the perfect offset here to stocks. It is our belief that only with an improving economy will interest rates rise measurably. This rate rise and improved economic conditions would most likely herald continued solid performance in the stock market. So, accept bond underperformance as your hedge to the equity market.
Two, it is possible, remotely surely (tongue firmly implanted in cheek) that we are wrong. We subscribe to the theory that an investment adviser should never be too sure he/ she is right and that it is the quickest way to lose both money and clients. If the bond market does advance this would most likely mean a weak economy and weak stock market. In that case, we will welcome this diversification.
In short, diversification makes sense. It made sense in 2001, 2008 and during the Summer of 2011 when stock investors flocked to lower risk bonds and those bonds made the downside in the market easier for our investors to survive. It makes sense now too and we’ll work hard to make certain that your portfolios reflect this.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial adviser. Please note that Fagan Associates, Inc or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial adviser prior to making any changes to your portfolio. To contact Fagan Associates, please call 518-279-1044.