The Herald Bulletin

April 20, 2013

'Big Joe' Clark: Your portfolio might be at risk

By Joe Clark
For The Herald Bulletin

— There used to be a time when all stocks would rise and fall together. Investors could throw a dart and hit a winner, no problem. John F. Kennedy said in a 1963 speech that “a rising tide lifts all boats.” Well the tides have changed and while it’s been rising, some boats seem to have a leak. The days of traditional diversification have at the very least gone on vacation and at worst have changed forever.

Americans have been encouraged and instructed for years that they simply need to hold a mix of equities and bonds and they will be okay in the long-run. Trust the markets, stay diversified and relax was the mantra of many in the investment product sales force. Many that followed this strategy saw their portfolios catch fire during the Financial Crisis of 2008. In September and October of ‘08 Barclay’s Aggregate Bond Index fell nearly 16% with the S&P 500 fell nearly 40%.

Eventually the bonds were able to recover as even equities continued to slide. This period of time had many investors pulling their hair out and questioning their financial futures. For a couple of months it seemed that nothing was safe and nest eggs were at risk. It’s this type of “everything goes down”-type market action that causes investors to make emotional changes to their investments which can have long-lasting negative impacts. Remember fear and greed are at the root of most emotional movements in the market with fear always being the stronger of the two.

Fast forward to present day we can see that general passive diversification within equities doesn’t produce the type of returns many have grown to expect. Before the recent bout of weakness in the S&P 500, the equity index was up over 10% year-to-date. However, the same cannot be said for each specific sector of the market. As of last Thursday the Materials sector was down 8.7% and the beloved Technology sector had fallen 5.7% from the start of the year. Turning our attention to gold, which since 2009, and more or less 2002, seemed like it could never go down has entered its own bear market. Gold is off over 20% from its October 2012 high.

Passive strategies have fallen to the wayside of smart investing. For millions of Americans that are approaching retirement we are at a critical juncture. Simply picking up a few mutual funds and calling it a day no longer holds the weight it once did. Diversification is important, but the way we diversify is vital.  Correlation among asset classes is constantly changing, and while it may not be crucial to follow and actively trade equities, bonds, and commodities on a daily basis – understanding how markets work and what’s going on within a portfolio is paramount to having a successful retirement. The world has changed. The tax code is fluid and you need to be prepared in order to enjoy your life after work.

Joseph “Big Joe” Clark, whose column is published Sundays, is a certified financial planner. He can be reached at bigjoe@yourlifeafterwork.com or 640-1524.