Halfway Between Double or Nothing

The official numbers aren’t in yet but it looks like 2015 ended without a bang for US markets.  The S&P 500 managed somewhere around 1% total return and the Barclay’s Aggregate ended up about .5% — nothing worth getting excited over.

Of course, across the globe and everywhere in between there were substantial divergences in fortunes.  An article from Bloomberg highlights the spread, and Figure 1 below (from the article) sums up everything nicely.

Within cross sections of the stock and bond markets, risk seekers could have literally ended up with “double or nothing” —  the Jamaican stock market almost doubled in value, while some coal-producer bonds lost practically all theirs’.

Not surprisingly a globally balanced and diversified investor should have ended up somewhere halfway between double or nothing — approximately flat.  Again, that’s nothing to get excited about, but investors shouldn’t be too hard on themselves for not hitting that “double.”

Realistically the odds of having correctly allocated 100% of a portfolio into Jamaican stocks are probably about the same as the odds of having incorrectly allocated 100% into coal-producer bonds.   In that sense, there was no real opportunity lost, and an in-between result should have been expected.

At times like now, it may seem like a balanced approach doesn’t produce results. But it’s important to remember that balance is ultimately a long-term strategy and should be measured over the course of decades, not a single year.  Figure 2 from JP Morgan shows this point well by comparing the returns of a balanced 50% stock / 50% bond portfolio (in orange) to that of the broad stock (grey) and bond (blue) markets.

Notice that over time the balanced portfolio generated similar average returns, but with significantly less uncertainty (shown by a tighter range of outcomes). The point is lackluster returns in 2015 aren’t a good reason to abandon a balanced approach.  If anything it would be a reason to practice the discipline needed to adhere to a successful long-term strategy.

With year-end upon us, perhaps the most important thing that investors should do is review their circumstances and confirm that their chosen strategies are still optimal for their needs and goals.  If so, start off the new year on the right path by staying the course.

Victor K. Lai, CFA

This blog is for informational purposes only. Nothing on this blog represents advice. Investing is inherently risky and involves the potential for loss.