Diversification is Still Working!

While most stock markets throughout the world and specific sectors in the US declined during 2008, the effects of diversification (and it’s benefits) can again be clearly shown so far in 2009.

By diversification, we mean more than just owning lots of different stocks. We feel it is important to own different baskets of stocks of different size companies, both in the US and throughout the world.

As of May 28, 2009,

  • The S & P 500 Index (of US Large company stocks) was up just under 2% for the year,
  • Many international markets are up between 10-20% and,
  • Emerging markets are up over 30-40% for 2009

This is why we continually recommend broadly based, globally diversified portfolios. We think it is important that most investors have a significant weighting of their stock portfolio in investments outside of the US.

While many investors will review these figures sometime during 2009 and decide that now is the time to “jump into international and emerging markets,” we have maintained our weightings in these markets and may begin to take these gains as opportunities to sell some of the gains. That way we continue to try to “buy low and sell high.”

FDIC Extension and Impact for You

The FDIC announced recently that FDIC institutions (banks, generally), are now insured up to at least $250,000 per depositor through December 31, 2013.

This is a significant lengthening of the expanded FDIC insurance coverage. When originally announced in October, 2008, the expansion from $100,000 per depositor to $250,000 was to expire on December 31, 2009.

The impact of this on investors is that they should continually review and evaluate interest rates and fixed income choices. You may be surprised by the results. Based on current interest rates, it may be advantageous for even a very high tax-bracket investor to purchase a CD rather than a high quality (AA) municipal bond, for a two or four year maturity. With the extended FDIC insurance, there is no risk with the CD and it should pay a higher after-tax yield than a high quality municipal bond.

This again emphasizes that a fixed income portfolio should be constantly monitored and evaluated, as interest rates and the regulatory environment can create unanticipated opportunities.

Similarly, there is almost a 1% interest rate increase in purchasing a 7 year TIP (Treasury Inflation Protected Security), rather than a 5 year maturity. This is a unique opportunity. For the additional 2 years, the market is providing an excellent interest rate reward.