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Diversification and Market Timing
By Tim Pitney
Diversification: What Has Failed? Have you ever felt as if you’ve followed all of the rules and conventional wisdoms and never achieved the desired results? It happens all the time with dieting for many people, but never before have investors felt this phenomenon more than in 2008. People listened to their financial advisors, constructed diversified portfolios, took time to understand asset allocation, tried to avoid market timing and in the end felt like they’d been had. With Equity returns down as much as 44% in 2008 it was easy to feel this way. So did diversification fail?
Not really. While it was easy to get swept up in the “everything is down” mentality, having a diversified portfolio during one of the worst bear markets in history helped to limit investor losses. To illustrate we’ll take a look at core asset class (domestic and international equity, domestic fixed income). According to 401k compass’ market review of the second quarter in 2009, the best performing asset class in the 1-year period ending 06/30/2008 was Core Fixed Income, up 6.05%. The worst performing asset class was International Equity, down -30.96%, representing a spread of 37.01% from best to worst. Now how did a diversified portfolio do (60% stocks, 40% bonds)? During the same 1-year period, a diversified portfolio was down only -14.08%.*
Timing: Are You Smarter Than The Market?
So why not just put everything into bonds when the market goes bad and back into stocks when the market is good? Most professional money managers regard market timing as a fool’s errand (as does this author), but let your confidence in your own answers to these questions be your guide.
What was the best performing asset class Q2 2009? (Hint: it was the worst performing asset class over the 1-year period ended 6/30/09)
What is the worst performing asset class Q2 2009? (Hint: it was the best performing asset class over the 1-year period ended 6/30/09)
Were you smart enough to know that back in March and take action before the run-up?
The investment advisory team at Sapers & Wallack can help the novice to the most seasoned investors feel comfortable with the investments they select for their hard earned dollars to grow and mature. For our corporate clients, we design retirement plans and conduct employee education seminars to give individuals insight and tools to help them make the right decisions. Individual investors receive guidance from our professional advisors to design effective strategies to maximize wealth accumulation through efficient tax planning and prudent investment performance. For both individuals and corporations, Sapers & Wallack’s approach is with the client in mind, not the market’s latest trend.
Tim Pitney is the Vice President for Investment Advisory and is responsible for managing the four business units of the Investment Division: private client services, qualified retirement services, financial planning, and variable life insurance modeling. Please contact him at tpitney@sapers-wallack.com if you would like to learn more about diversifying your portfolio.