I hope you enjoyed the Super Bowl commercials last night more than the actual football game! Once again, the game revealed that “a good defense, always beats a good offense“. We believe this also translates into portfolio management and why we incorporate hedging strategies into your investment portfolio, providing you with a level of protection during stock market declines.
January Market Review:
From the matrix below you will see that the month of January was a difficult one for stock investors as losses ranged from -2.77% for small cap U.S. stocks (Russell 2000 Index) to -6.47% for emerging market stocks (MSCI Emerging Markets Index). The losses for large cap U.S. stocks (S&P 500 Index) were -3.46% and for international developed country stocks (MSCI EAFE Index) the declines were -4.02%.
|S&P 500 (U.S. Large Cap)||-3.46%|
|Russell 2000 (U.S. Small Cap)||-2.77|
|MSCI EAFE (Int’l Stocks)||-4.02|
|MSCI Emerging Markets||-6.47|
|CBOE REIT Index (REIT’s)||+3.63|
|DJ UBS Commodities Index||+0.29|
|Barclays Agg. Bond Index||+1.48|
The declines over the past month can be attributed to turmoil in emerging markets as worries about a slowdown in those economies has spooked investors and led to a 10.6% decline in the MSCI Emerging Market Index from 10/22/13 through 1/31/14. Until recently emerging markets have historically provided investors with better returns than developed countries but have also exposed investors to higher risk (volatility).
Our Investment Strategy:
Since we have modest exposure to emerging markets within your portfolio, we have addressed the risk associated with this asset class by using structured notes that provide participation on the upside (during rising markets) but also provide a level of downside protection (during falling markets). We believe that this is a more prudent way to invest in emerging market stocks.
While January was a rough month for both domestic and foreign stocks, the month provided a great example of why our clients’ portfolios are diversified among a variety of asset classes including stocks, bonds, real estate (REIT’s), commodities, and hedging investments. During the past month REIT’s, commodities and bonds all posted positive returns. If all of your investments go either up or down together, that is known as “positive correlation” and means that your portfolio is not well-diversified. If an investment goes up while another investment goes down, that is an example of “negative correlation”. A well-diversified portfolio should consist of investments that do not move in tandem with one another. It is for that reason that we diversify your portfolio among a number of asset classes that have historically possessed low or negative correlation with one another. You want some of your investments to “zig” while others “zag”, ensuring broad diversification within your investment portfolio.
2014 Market Outlook:
Notwithstanding the modest decline by the stock market during the month of January, we remain optimistic for the remainder of the year for a number of reasons that include an improving economy, solid corporate earnings and a low interest rate environment that is providing stability to the housing market. The economy continues to show strength as measured by the Gross Domestic Product (GDP) which grew at a rate of 3.2% during the fourth quarter of 2013. On Friday Bloomberg reported that 79% of the 251 companies in the S&P 500 have beat analysts’ profit estimates and the recent Case-Shiller 20 City Index revealed a 13.7% year-over-year gain in home prices. In addition, the Federal Reserve stated last week that it will “employ its other policy tools as appropriate.” Based upon the reasons outlined above, we remain cautiously optimistic for the remainder of 2014, but recognize that an increase in volatility may be experienced by stock market investors in the foreseeable future as developments in emerging markets may provide moderate headwinds for both foreign and domestic stock markets going forward.
Learn More About 1650 Wealth Management:
You can download our FREE 13 page Investment Guide: ” How The Wealthy Invest, What They Know That You Don’t” by CLICKING HERE .
1650 Wealth Management is an independent, private wealth management firm located in Miami and Fort Lauderdale, Florida. We specialize in creating and actively managing custom, comprehensive and disciplined investment management strategies, designed to grow and protect your wealth, while employing tax minimization strategies. Our fee-only, independent wealth management advisors posses over 40 years combined investment management expertise providing credentialed, objective and transparent investment counsel, with a fiduciary duty. We welcome the opportunity to introduce you to our experienced wealth management firm and invite you to schedule a free 60 minute consultation to discuss your financial objectives or just to receive a second opinion. Call or email us today to schedule your no-obligation consultation. We look forward to meeting with you! Please visit us at: www.1650wealth.com to learn more.