The Nowhere Year

Below is information from a Bloomberg article dated 12.29.15 entitled “The Year Nothing Worked”

2015 has been an awful year for asset allocation funds. In fact, if you judge the past year by which U.S. investment class generated the largest return, a case can be made it was the worst for asset-allocating bulls in almost 80 years, according to data compiled by Bianco Research LLC and Bloomberg. With 3 days left in 2015, the Standard & Poor’s 500 Index gained only 2 percent with dividends, cash is up less, while bonds and commodities show losses.

After embracing everything from Treasuries to high-yield bonds and technology shares amid seven years of zero-percent interest rates, investors found themselves with nowhere to run at a time when the Federal Reserve’s campaign of stimulus drew to an end. Normally it isn’t like this. Since 1995, practically every year has seen some asset deliver returns exceeding 10 percent.

Bianco Research keeps track of the S&P 500, 30-year U.S. Treasury bonds, 3-month Treasury bills and the Thomson Reuters CRB Commodity Index to gauge performance in stocks, bonds, cash and commodities. The four are the most common asset classes considered by investors when an allocation strategy is designed, according to Jim Bianco, the founder.

While the depth of losses in equities and commodities is nowhere near as bad as in 2008, the correlation of declines highlights the challenge for money managers who seek to amplify returns by diversifying among assets. Among other things it’s a recipe for pain among hedge funds, according to Bianco. The industry is heading for its worst annual performance since 2011.

With nothing going up, exchange-traded funds that invest in different asset types as a way to diversify risk have struggled. Among 35 such ETFs tracked by Bloomberg, the median loss for 2015 is 5 percent. The popular First Trust Multi-Asset Diversified Income Index Fund is down 7.4 percent. The S&P 500 has made little headway in 2015, adding 0.1 percent without dividends. Equities fared worse in dollar terms outside the U.S., with the MSCI EAFE Index dropping 3.1 percent while the MSCI Emerging Markets Index sinking 16 percent.

Historically, in a properly allocated portfolio, your investments will not all move in the same direction. That is why you need different levels of correlation. Narrowing your investments to just one or two asset classes creates more risk and volatility.

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