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2013 Was A Poor Year For Diversification

 

By Louis P. Stanasolovich, CFP®, CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.
and Editor of The Global Investment Pulse

Many investors, as well as investment professionals, have been saying that 2013 was a great year.  True, but only if invested in U.S. Stocks or Developed Country stocks.  Most other Asset Classes had very low, if not negative, returns.

While virtually every investor knows the benefits of diversification, especially over the long run, it simply did not work for such a short timeframe (Calendar Year 2013).  As a result of the returns in 2013, should diversification be abandoned?  Most investment professionals would say, “Not on your life”.

In fact, it is even more important to consider diversifying.  Does that mean selling winners and rebalancing back to some of the non-winning asset classes or even the losing ones?  Yes! 

While it’s true that lightning can strike twice assuming an increase in 2014, two years in a row (actually, three, including 2012’s mid-teen returns), the higher the probability that the stock market will rebalance over-weighted portfolios to one asset class itself by selling off.  It’s better to act first than incur losses.  It has been proven time and time again, especially in a Secular Bear market, such as the current one, which began in late March of 2000 (See the Secular Bear Market Watch chart below.) that rebalancing periodically, especially when asset classes have had a large run-up or decline will offer the best returns over 10 to 20 year period.




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