When the markets don’t meet investor expectations, it is a normal reaction to second guess the chosen strategy. Certainly, from my September 30 blog post title, “Where’s the Growth?, I highlighted many of the current negative factors leading to malaise in the capital markets (except, of course, for the “Magnificent Seven”) – not including the Israel/Hamas war that had not started yet!. See chart below for a few of the Magnificent Seven (Apple, Microsoft, Amazon and Nvidia, the red line on the top) to see how they outperformed versus the S&P 500 (IVV, the green line on the bottom) on a year-to-date basis.
So, if you were NOT 100% invested in the Magnificent 7 this year, you may begin to wonder where your wealth should be allocated. Alternative assets like hedge funds and private equity? Real Estate? Or maybe go to a casino?
Some sophisticated advisors will often suggest allocations to the alternative asset space as a way to add diversification and potential extra return to an investment portfolio. This sometimes works and sometimes does not depending upon the market cycle. For example, the $40 billion Yale endowment (which holds lots of alternatives) recently reported that their 1-year return ended June 2023 was +1.8% that significantly lagged a moderate risk diversified growth portfolio (iShares Growth ETF, AOR) that was up +9.0% over the same time frame.
Real estate is another place to go to diversify an investment portfolio. Most D&A accounts have some exposure to real estate through the real estate investment trust (REIT) structure in exchange-traded fund (ETF) form. Unfortunately, though the REIT market had some positive blips it has continued to struggle in the post-covid environment with only middling returns through today. Single-property vacation homes and rental properties certainly rallied during the post-covid period, but gains seem to have peaked and fallen off during this current Fed tightening cycle. Carry costs, the headaches of owning other property and idiosyncratic return profiles are negatives to this strategy, though.
Finally, why not just sell everything and hold 100% cash at a current 5.50% yield for the next six months? This could work if you had perfect foresight (no one does, of course) and don’t mind missing any upside when/if the market recovers. In some cases, when the quantum of investments is large enough and your time horizon is short enough, this may be the correct strategy, but for long-term investing it is a fools’ errand. You may as well just go to the casino!
No one knows where the market will go from here, but in this market cycle D&A has consistently been tilting most client accounts to higher quality and shorter bond duration during 2023 as we strive to avoid large drawdowns and provide some upside to client accounts. As we all know, aside from the Magnificent Seven, dividend payers (mostly financials and utilities), small/mid-cap, and international/emerging markets have all struggled badly this year and detracted from account performance, but I am expecting that they will recover over time thus rewarding investors who “stayed the course!”