Portfolio Newsletter 1Q 2014

The first quarter held some interesting developments. Chief among them:

  • A red hot U.S. stock market caught its breath.
  • The Federal Reserve cut back on its bond purchase program.
  • Interest rates declined.
  • The crisis between Russia and Ukraine affected international investments.
  • Emerging market funds bottomed out.
  • Value stocks outperformed growth stocks.

These developments demonstrate the importance of diversification. The United States is rapidly reaching the peak of the business cycle. This means we probably won’t see the same returns we’ve enjoyed over the past few years.

At the end of 2013, changes I made to the funds in the portfolios include the following:

Reduced risk in the bond allocations by replacing the existing funds with bond funds that have low maturity and low duration risk. Reduced risk in the Large Cap Growth allocations by replacing the existing funds with large growth funds that have a lower Beta and lower Standard Deviation. Reduced risk in the Emerging Markets allocations by replacing the existing fund with an emerging markets fund that has considerably less risk and greater upside potential.

The end result during most of first quarter was that all portfolios outperformed the S&P 500. The Moderate portfolio matched and the two higher risk portfolios outperformed the S&P 500 by quarter end. More importantly, each portfolio is well diversified. That means each portfolio is insulated from a variety of market risks. And the fund selection process works!

You may also be interested to know that in volatile times like these a process can be further analyzed to see whether or not it can be improved.

Analysis of the business cycle is one such improvement to the selection process. Adding this analysis helps to determine which stage we are at in the cycle, and subsequently which sectors do best at that specific stage of the cycle. In addition to other criteria, we then seek funds with high concentrations in those sectors. I believe this helps facilitate higher portfolio returns with less risk in the future.