Surprise or not a surprise?


The financial markets in the US have been strong so far in 2016.

With the S&P 500 up 9.6% through November 30th, it may be a distant memory that the year began with 6 down weeks. By February 1slide011, 2016, the S&P 500 was down 11%, due to concerns about Japan’s economy.

While these figures may surprise you, our focus on the long-term, not on short-term movements and predictions about current events, is to your benefit. In structuring investment portfolios, we generally invest more in small, small value and International stocks than many other financial advisors, who emphasize mostly US large company stocks.

Through November 30th, 2016, US small and small value stocks have vastly outperformed US large company stocks (per the S&P 500). Small value returns are greater than twice the S&P 500 returns. Does this surprise you? Have you benefited from this?

International stocks are positive for 2016, but trail the S&P 500. Emerging markets (smaller, non-developed foreign countries) have also outperformed US large company stocks, even though they have done poorly in the last two months.

In developing portfolios for our clients, we first focus on the proper allocation between stocks and safer, fixed income securities. This allocation is critical, as it provides a foundation to have the willingness and ability to remain invested when the stock market goes down. We provide the emotional foundation to remain invested in stocks.

Once that allocation is determined, we recommend that the stock portfolio be much more broadly diversified than owning primarily US large company stocks, such as the S&P 500.diversification

Why do we recommend this type of diversification? Because many decades of academic evidence and real world experience show the following, over the long term:

* Risk and return are related.
* Small stocks outperform large company stocks.
* Value stocks outperform growth stocks.
* International stocks outperform US stocks.
* Emerging Market stocks, which are the riskiest, outperform International and US stocks.

To receive the financial benefits of these expected returns, you need to be patient. There may be many years that the above does not occur, then the trends can turn when you least expect it. In the late 1990s, large company stocks outperformed small company stocks for many years, which were then followed by years of huge outperformance by small and small value company stocks.

So far this year, investors have been rewarded for their patience, as many of these expected returns have shown up.

Successful investment experiences require the proper strategy, planning and advice.

Be sure that you are properly diversified in the right asset classes. (If you are not a client, you are probably not adequately invested in certain asset classes.)

You may be surprised by some of these stock market results. While we do not know when these returns will occur, we are confident in our long term investment strategy, which is structured to benefit from these type of stock market moves.

 

 

 

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