Stock and bond market performance has been more volatile in 2018. After an amazing run in 2017 stocks have become more sensitive to interest rate hikes and potential disruptions in global trade because of ongoing trade negotiations by the Trump administration.
Bonds too have seen an increase in volatility as the Federal Reserve increases the Fed Funds rate and sell bonds from their balance sheet.
The start of the year was extremely volatile for both asset classes but over the last month U.S. stocks and bonds have settled down. Other asset classes are still struggling. Emerging market bonds are down over 4% and emerging market stocks have declined nearly 10% according to statistics from ETFReplay.com.
Over the years I have tracked the performance of 4 classical investment strategies from pillars in the industry. Here is a quick look at how they are doing so far in 2018.
Note: This data is historical and does not reflect actual account performance. Please see the performance disclosure below for additional detail. The benchmark for each strategy is the iShares Moderate Growth ETF (AOM). It is important to remember the CAGR (Compound Annual Growth Rate) for all these strategies are only using approximately 6 months of data. Year-To-Date (YTD) performance and volatility is provide below each summary.
We start with our baseline “Classic” Strategy Year-To-Date (YTD) performance. This strategy is considered a blue-chip approach to investing by several well respected investors. This mix of investments represents 60% U.S. stocks and 40% U.S. Bonds.
YTD: Classic Return: 2.8% vs. AOM Return 0.0% Volatility: 9.7% vs. AOM Volatility 6.0%
Next, we will look at the YTD performance 3-asset class strategy we call the “Cycle” strategy. This strategy holds 5 investments from 3 asset classes. It is the lowest volatility strategy I manage. The benchmark for this portfolio is the iShares Moderate Growth ETF, AOM.
YTD: Cycle Return: 0.6% vs. AOM Return 0.0% Volatility: 5.5% vs. AOM Volatility 6.0%
Adding more asset class, next we feature a “risk parity” strategy YTD performance. In this approach 7 asset classes are weighted based on their volatility (or risk) with lower volatility investments receiving a higher weight. The benchmark for this portfolio is the iShares Moderate Growth ETF, AOM.
YTD: Risk-Parity Return: -1.7% vs. AOM Return 0.0% Volatility: 4.1% vs. AOM Volatility 6.0%
Finally, the most diversified of the bunch, the 10-asset strategy YTD performance. This approach invests equally in 10 asset classes. The benchmark for this portfolio is the iShares Moderate Growth ETF, AOM.
YTD: Ten Asset Return: -0.4% vs. AOM Return 0.0% Volatility: 5.8% vs. AOM Volatility 6.0%
It is clear 2018 has not favored highly diversified strategies. Those strategies that focus on U.S. stocks have performed better.
For a real shocker, here is how 10 select industry groups I incorporate into my strategies have performed YTD. This is an all stock selection, so the benchmark has been changed to the S&P 500 (SPY).
YTD: Industry Group Stocks Return: 16.3% vs. SPY Return 5.6% Volatility*: 19.5% vs. SPY Volatility 16.1%
*Note the significant increase in volatility associated with the portfolio of Industry Groups. That is the trade-off for exposure to high-growth areas of the economy.
We don’t know what the future holds but as we embark on a new generation of product and service innovation, along with stronger economic performance in the U.S., I have been guiding clients to overweight U.S. stocks and incorporate industry groups from areas of the economy expected to grow faster than the general economy. It has been working well and has the potential to add value for years to come. In addition, I can include industry group exposure to any of the strategies above where risk-management characteristics should generally reduce volatility.
All the statistics provided by ETFReplay.com.
Past performance does not guarantee future results. Investments and the income derived from them fluctuate both up and down. Investments at Dightman Capital are subject to risks including loss of principal. No specific investment recommendations have been made to any person or entity in this written material. This presentation is for informational purposes only and is neither an offer to sell or buy any securities. Benchmarks or other measures of relative market performance over a specified time period are provided for informational purposes only. Dightman Capital does not manage any strategy toward a specific benchmark index. A variety of sources we consider reliable have provided information for this presentation, but we do not represent that the information is accurate or complete. Dightman Capital Group does not provide tax advice to its clients. Conduct your own research or engage an investment professional before making any investment decision. Investors are encouraged to discuss any potential investment with their tax advisors. The material provided herein is for informational purposes only. Data Sources: IDC, Dightman Capital.
