Some Market Perspective (Part 2)

Yesterday's post focused on the performance of a particular asset allocation that fits many retirees, i.e. those who are drawing down their nest egg.

To get further perspective here are the returns on the underlying market indices for various periods:

                         last 3 mos.       y-t-d        1 year       3 years     5 years
S&P500           -8.90%          -5.75%     -2.49%      13.18%     14.50%
MSCI EAFE    -9.98%          -2.63%     -9.68%        7.65%       5.93%
Russell 2000     -9.43%          -5.59%     -2.68%       13.09%     14.05%
Barclay's Bond     .02%            0.54%      1.65%         1.56%       3.06%
3 mo. t-bill           .00%              .01%         .02%          .04%         .06%
S&P GSCI     -17.60%         -17,80%    -44.12%     -19.68%     -8.29%

The MSCI EAFE is an international stock index and the GSCI is the Goldman Sachs commodity index. Note that the bond index was positive in each of the periods. Note that it returned a positive 1.65% over the past year as the S&P 500 had a -2.49% return. This is what the bond portion of a portfolio is intended to do! It acts as a sort of hedge to the volatile stock portion. To be clear, understand that the low yielding cash portion doesn't typically do this well. Over the past 12 months it returned .02%.

People like to ask about the purpose of holding cash in a portfolio. After all, the other asset classes tend to outperform over the long term. For the retiree drawing down a nest egg cash (i.e. money market fund) holdings are a buffer for meeting drawdowns and not having to liquidate stock or bond holdings in a down market. Selling stocks and bonds in a down market would be a type of reverse dollar cost averaging!  For the younger person, holding cash would be dry powder to put to work in a market like we are having today.

For the record I don't recommend holding commodities separately for the simple reason that commodities are a part of the overall market. For example, the S&P 500 has a goodly representation from the oil sector. So holding a commodity fund would be like double counting. If you have a strong view on commodities you can hold a commodities Fund but understand that you are making an over-weighted bet.

The bottom line here is that investing is a long term prospect. Focusing on short term results and thereby letting your emotions skyrocket in up markets and dive in down markets is typically counter productive.