Keep Calm
&
Remain Diversified

A Short- and Long-term Review of the Power of Diversification

For generations, investors have looked to stock exchanges as a way to participate in the growth of both local and far-reaching economies, drawn by the hope of earning a healthy return on their investment.

As the chart below shows, a hypothetical investment of $10,000 in the S&P 500 in 1926 would have grown to more than $70 million today. The growth was supported by many bull markets that lasted around 7 years with intermittent bear markets that lasted around a year and a half on average.

The Law of Market Cycles

S&P 500 Index Total Return Through Market Cycles Since 1926

Source: FactSet, S&P Dow Jones Indices as of June 30, 2019. The index is unmanaged, is not available for investment and does not incur expenses.
Past performance is no guarantee of future results.

A Closer Look at 10 of the Major Bear Markets


Source: MSNBC, FactSet, and S&P Dow Jones Indices. The index is unmanaged, is not available for investment and does not incur expenses. Daily returns are shown for the S&P 500® Index. As of June 30, 2019.

A Closer Look at the Current Bull Market

The current bull market is nearly a decade old but the rise has come with some volatility. Despite the length of this bull run, the Consumer Confidence Index is more than 5x higher than it was at the start.

Highlighted returns capture peak to trough corrections of 10% or more during the time period. Source: FactSet. As of June 30, 2019. 1 Source: The Conference Board. The Consumer Confidence Survey® reflects prevailing business conditions and likely developments for the months ahead. This monthly report details consumer attitudes and buying intentions, with data available by age, income, and region. Measurement dates: March 31, 2009, and September 25, 2018. Past performance is no guarantee of future results.

Feast or Famine

Although the S&P 500 averages 10% return since 1926, the year-to-year returns are rarely in that range.

Source: FactSet, S&P Dow Jones Indices. Data calculated from 1926-2018 using total return.
Past performance is no guarantee of future results.

Defining Volatility for Clients

Looking at the last 20 years, the intra-year swings are dramatic.

S&P 500 Calendar Year Total Returns (%) 1999-2018

Source: FactSet, S&P Dow Jones Indices. The index is unmanaged, is not available for investment and does not incur expenses. Data calculated from 1999-2018 using total return.
Past performance is no guarantee of future results.

While a diversified portfolio has offered a smoother ride for investors.

 Roll over for a breakdown of the diversified portfolio

Diversified Portfolio Calendar Year Returns (%) 1999-2018

Diversified Portfolio Allocation: Investment Grade Bonds (IG Bonds): 32%, Municipals (Munis): 5%, U.S. High Yield Bonds (US HYB): 5%, U.S. Large Cap Equity: (US LC): 23%, U.S. Small Cap Equity (USSC): 10%, Foreign Developed Equity (For Dev): 10%, International Small Cap (Intl SC): 5%, Emerging Markets (EM): 5%, U.S. Real Estate (REITs): 5%. Alternatives is 5% of this allocation in every other representation of the diversified portfolio in this presentation. However, daily data is not available for the HFRI Index, so it is omitted from this chart only.

Long-Term Perspective

Remaining invested is critical. Missing as few as 10 days can significantly impact returns.

Growth of $1,000,000 (1999-2019)

Source: FactSet. As of June 30, 2019.
Past performance is no guarantee of future results.

 

 

The Importance of a Long-Term Perspective

Maximum and Minimum Annual Total Returns (%)

Source: FactSet. As of June 30, 2019. Past performance is no guarantee of future results.

Diversified Portfolio Allocation: Investment Grade Bonds (IG Bonds): 30%, Municipals (Munis): 5%, U.S. High Yield Bonds (US HYB): 5%, U.S. Large Cap Equity: (US LC): 20%, U.S. Small Cap Equity (US SC): 10%, Foreign Developed Equity (For Dev): 10%, International Small Cap (Intl SC): 5%, Emerging Markets (EM): 5%, U.S. Real Estate (REITs): 5%, and Alternatives (Alts): 5%.

Diversification Requires Thinking Beyond the S&P 500 Index

A Diversified Portfolio* has historically smoothed out the ride over the long term without sacrificing returns.

The chart below demonstrates the unpredictable nature of individual asset class returns in a different way. In this chart, U.S. large cap equities are used as the “anchor” asset class. Compared to the anchor, you can see that the performance of some asset classes is erratic; a category that beat U.S. large caps one year can easily underperform in the next year. But when a number of asset classes are combined into one diversified portfolio (the orange rectangles), some of that unpredictability may be removed.

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 Roll over for a breakdown of the diversified portfolio

Click here for a list of representative indices.  Past performance is no guarantee of future results.

* The diversified portfolio is rebalanced to the original allocation annually.

A diversified portfolio has the potential to smooth the ride while reducing losses.

Diversified Portfolio and S&P 500 Index Returns

Source: Barclays, FactSet, Standard & Poor’s as of As of June 30, 2019. Past performance is no guarantee of future results.
Bear Market
defined as peak-to-trough decline of at least 20 percent.

20-Year Returns and Standard Deviation (1999-2018)

Source: FactSet, S&P Dow Jones Indices. See disclosures below for representative indices. Past performance is no guarantee of future results.
Standard Deviation (Std. Dev.): A measure of risk; it calculates the variability of returns by comparing the Fund’s return in each period with the average Fund return across all periods.

Action Plan

The recent increase in stock market turbulence underscores the importance of having a sound diversification strategy in place. The potential benefits of diversification are clear in terms of providing:

  • Less risk than a non-diversified portfolio
  • A smoother ride through market ups and downs
  • A better sense of preparedness in the event of a market downturn

Your financial advisor can offer guidance to help ensure your portfolio is diversified appropriately. He or she may:

  • Assign different risk levels to parts of your portfolio that are linked to specific goals such as:
    • Saving for college
    • Planning for retirement
    • Other short- and long-term personal goals
  • Where applicable, develop a strategy to reduce concentration risk associated with employee stock options
  • Monitor your diversification strategy annually, rebalancing as needed to avoid unintended concentrations in any one category



Diversification does not guarantee a profit or protect against a loss in declining markets.

Investments in debt securities are subject to credit and interest rate risk. An increase in interest rates typically causes the value of bonds and other fixed income securities to fall.

Investments in international securities are subject to certain risks of overseas investing including currency fluctuations and changes in political and economic conditions, which could result in significant market fluctuations. These risks are magnified in emerging markets.

Investments in small-capitalization companies are subject to greater price volatility, lower trading volume and less liquidity than investing in larger, more established companies.

Real estate investments are subject to factors such as changing general and local economic, financial, competitive and environmental conditions.

Alternative investments are speculative, subject to high return volatility and involve a high degree of risk including, but not limited to, the risks associated with leverage, derivative instruments such as options and futures, distressed securities, may be illiquid on a long term basis and short sales. There can be no assurance that these types of strategies will achieve their objectives or avoid substantial losses. Alternative investments may also be subject to significant fees and expenses.

The Bloomberg Barclays U.S. Corporate High Yield Bond Index (Representing U.S. High Yield) is a total return performance benchmark for fixed income securities having a maximum quality rating of Ba1 (as determined by Moody’s Investors Service).

Bloomberg Barclays U.S. Aggregate Bond Index (Representing Investment Grade Bonds): The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.

The Bloomberg Barclays U.S. Municipal Bond Index (representing U.S. Muni Bonds) is a broad-based benchmark that measures the investment grade, U.S. Dollar-denominated, fixed tax exempt bond market. The index includes state and local general obligation, revenue, insured, and pre-refunded bonds.

The HFRI Fund Weighted Composite Index (Representing Alternatives): is a global, equal-weighted index of over 2,000 single-manager funds that report to HFR Database. Constituent funds report monthly net of all fees performance in U.S. Dollar and have a minimum of $50 Million under management or a twelve (12) month track record of active performance. The HFRI Fund Weighted Composite Index does not include Funds of Hedge Funds.

MSCI World Index Ex USA (Representing International Equity): The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 developed markets countries*—excluding the United States. With 1,021 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

MSCI Emerging Markets Index (Representing Emerging Market Equity): The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 24 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and the United Arab Emirates.

The MSCI All Country World Index (ACWI) ex USA Small Cap (representing International Small Cap) captures small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the U.S.) and 24 Emerging Markets (EM) countries*. With 4,329 constituents, the index covers approximately 14% of the global equity opportunity set outside the U.S.

Russell 2000® Index (Representing U.S. Small Cap Equity) Measures the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States.

The Dow Jones U.S. Select REIT Index (representing U.S. Real Estate) tracks the performance of publicly traded REITs and REIT-like securities and is designed to serve as a proxy for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.

The S&P 500 Index (Representing U.S. Large Cap Equity) is a capitalization-weighted index of 500 stocks. The S&P 500 Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The indices are unmanaged, are not available for investment and do not incur expenses.

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