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Diversification is Still Key when Building Portfolios Thumbnail

Diversification is Still Key when Building Portfolios

Cesar Ortega Discovery Financial Planning Investment Management

2023 is almost over and we’ve managed to see US equity markets rally over 20%, international developed equities over 15%, and US bonds over 5%. Additionally, US unemployment is below 4%, and close to its 10-year low, and inflation has come down to 3.14% after it peaked at 9.06% in 2022 – see illustrations below.

So, given what many would consider a good year, what comes next?

While we can’t predict what markets will deliver into the future, we can look at historical data to develop a frame of reference for possible outcomes. Our blog in January of this year looked at 2022 performance and attempted to do just that. The blog lists the 10 worst calendar years for both bonds and stocks and analyzes the subsequent 12-month returns to calculate an average return. This average was 6.2% for bonds, and 4.9% for stocks according to BlackRock. 2023 has thus far proven to be in-line with bonds delivering 5% and especially good for stocks delivering 24% as of 12/20/2023.

Now, coming out of such strong performance in equity markets this year, we look at all the times stocks delivered over 20% and their returns the following year – see table below.

Here are some summary statistics based on this table:

  • Stocks were up 22 out of the 34 years following a 20% or more gain; 65% of the time.
  • Stocks were down 12 out of the 34 years following a 20% or more gain; 35% of the time.
  • Stocks averaged 8.9% following a 20% or more up year.
  • The average gain in up years was 18.8%.
  • The average loss in down years was -9.1%.
  • There were 19 double-digit up years.

In summary, based on this table, one can conclude that most of the time stocks go up, but sometimes they go down. As a result, our job, as investors, is to understand the volatility inherent in capital markets, and position our portfolios for a wide range of possible outcomes via diversification. The table below, which I am recirculating from our January blog, illustrates how hypothetical returns of a diversified portfolio outperformed the S&P 500 over the last 20+ years.

Sincerely,

Cesar Ortega

Portfolio Manager

 

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Disclosure:

The views expressed represent the opinions of Wolf Group Capital Advisors as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.  

Diversification and asset allocation do not ensure a profit or guarantee against loss.

The information presented is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.

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