The first half of 2013 is in the books. It’s been a good year in terms of the domestic stock market; other areas of the markets have been mixed. The second quarter saw declines in most fixed income categories, real estate, and in many international stock categories including emerging markets. Commodities and precious metals have also suffered setbacks of late. As an investor this is a good time to take stock of your investments and more importantly any implications for your financial planning goals.
When reviewing your portfolio keep these 5 investing lessons learned (and relearned) in the first half of 2013 in mind.
Components of a diversified portfolio can lose money
Diversification and balance are generally good characteristics for an investment portfolio. However it is not uncommon for some components of a well-balanced portfolio to lose money over a quarter or longer. Case in point during the second quarter of 2013 virtually all fixed income categories lost money. Of the major bond investment styles high yield led the way with a loss of 1.4% for the quarter while TIPs suffered the worst loss at 7.0%. The fact that some components of a diversified portfolio might suffer a loss at various times should not come as a surprise as one of the goals of diversification is to include some asset classes with a low correlation to other portfolio holdings.
Gold doesn’t always glitter
Gold, touted by many as the ultimate safe haven investment really took it on the chin during the second quarter. The main Gold ETF (ticker GLD) lost 22.89% in the second quarter and is down 26.48% for the first six months of 2013. This brings the five year trailing return of the ETF down to 5.44% compared to 6.92% for the S&P 500 ETF (ticker SPY). Gold may ultimately stage a major comeback but these results fly in the face of the doom and gloom folks who tout Gold and other hard assets as the ultimate investment solution. A college economics professor once told the class that investors in Gold had not progressed past Freud’s anal stage of development. That may or may not be true but like anything else a portfolio that is top-heavy in Gold and precious metals may not be the answer.
The stock market can go up even if Apple doesn’t
Apple, the largest component of the S&P 500 index, lost 24.42% over the first six months of 2013. However the index still gained 13.82% over the same period of time. Apple is also a large holding for many large cap mutual funds and ETFs.
The rally in bonds may be over, or maybe it isn’t
As I mentioned above, the second quarter was dismal for bonds of all types. Bonds and bond mutual funds have enjoyed 30 years of mostly continuous gains, in large part due to a favorable interest rate environment. Some say the favorable period for bonds may be over, but others say investors who have yanked $ billions from bond funds may be overreacting. Time will tell. One thing is certain to me is that this is a good time to evaluate your fixed income investments and to look at the duration risk that you are taking.
Investors are enthusiastic when things “feel good” in the markets
As typified by an infuriating commercial for John Hancock showing several couples saying they need to get back into the markets now, more investors have been finally feeling good about getting back into the markets after the market drop of 2008-09. It’s easy to invest when things feel good; it’s profitable to invest when they don’t. If you are an investor just getting back into stocks now you need both a good financial plan and a financial advisor who knows what he or she is doing.
Six months into any year is a good point to review your investments and your progress against your financial plan. Given the wide variations in performance among various asset classes this is an especially good point to review your situation.
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