2013 Market Returns and Your Portfolio

Despite all the uncertainties that we faced in 2013 (the government shutdown, Boston bombings, the ongoing
Syrian uprisings, debt ceiling debates, National Security Agency (NSA) revelations, super‐storm Sandy, nuclear standoff with Iran) and predictions of a poor investing year, the U.S. stock market moved to record highs on the final trading day of the year. Investors who got out of U.S. stocks during the market crisis of 2008 (and worried ever since) have missed one of the best 5‐year bull market runs in American history (up more than 100%). So, it was a great year for the markets! But indeed, that is just part of the story…

This ‘periodic table’ of the world financial markets as shown by representative asset class Exchange Traded Funds (ETFs) adds perspective to the picture of 2013.




While the US Equity markets were sharply higher, Foreign Equities (International Developed and Emerging
Markets) were a mixed bag, while Bonds and Natural Resources/Commodities were largely lower. For perspective, consider your asset allocation which is spread across multiple asset classes including Equities (US, International Developed and Emerging Market countries), Bonds (foreign and domestic), and Alternatives (Real Estate, Natural Resources, Commodities, and Metals). Should you have a largely Bond and Alternative asset allocation as a result of your stage in life and risk tolerance, then 2013 tells a different story.

Our diversified approach did ‘as expected’ in that some asset classes were up and some were down. Certainly, you didn’t do as well as if you were 100% in the better asset classes; and, similarly, didn’t do as poorly as if you were 100% in the under‐performing asset classes.

Since neither we (nor the pundits) know which asset class will be having the best year in advance, we maintain an asset allocation with holdings tailored to your situation. And so, we can’t let the returns of a single year cause us to appreciably shift your portfolio built upon the data of more than one hundred years. While some investment advisors do 'chase returns,’ we believe it is typically a ‘loser’s game’ as the asset class which is this year’s best is often next year’s worst (and vice versa) as shown below. Every dog has his day so to speak.



Long‐term investors can be compared to farmers who plant seeds with no foreknowledge of the weather during their growing season, and no belief that what happened this year has any impact on what will happen in the next one. There will be bad years, and good years, but over time, the good years have tended to outnumber bad ones, which is why it makes economic sense to continue planting the seeds each Spring‐‐or staying invested in the stock market when each coming year is a mystery. As we have discussed on many occasions, the long‐term trend for the markets has been up and to the right (referring to the line graph which portrays market performance over time)…



Systematic, disciplined rebalancing of your long‐term portfolio allows us to smooth out the fluctuations, keep the overall volatility of the portfolio consistent with your risk tolerance, and forces us to ‘buy low and sell high’.

No doubt, many investors will continue to wait on the sidelines, looking for "proof" that the market recovery is finally for real, while others will keep their money from working on their behalf in expectation of a crash. The former group may finally get back in when prices have peaked, and in turn, potentially serve as our most reliable indicator that the market has become overvalued. The latter will miss the next downturn, but likely also lose out on the positive returns that have, historically, outweighed the losses suffered in bear markets. The past five years have given us a useful lesson: that you plant your seeds in the expectation that there will be bad crops from time to time, but these unexpected booming years can make up for the losses.