No Place To Hide

In a broadly diversified portfolio, there’s usually something working in any given year. When stocks are down, bonds are typically up. When bonds are down, stocks are typically up. When stocks and bonds go down together, something else is often up (TIPS, Commodities, REITs or Gold).

Well, not this year.

In 2018, more than any year in recent history, the overwhelming majority of asset classes are down. In the table below of 15 asset classes ranging from stocks to bonds to REITs to Gold and Commodities, only one is higher: Cash.

(Click on image to enlarge)

Data Source: Stockcharts.com

In 2008, when stocks had their worst year since the Great Depression, bonds were solidly higher. In 2013, when bonds had one of their worst years in history, stocks were solidly higher.

This year, there’s simply been no place to hide, with the exception of cash.

If you maintain a globally diversified portfolio, this has likely been the worst year for you since 2008, with a 60/40 portfolio (AOR ETF) down just over 6%.

(Click on image to enlarge)

To be sure, this is but a scratch compared to the devastating losses investors faced in 2008. But for a whole generation of new investors who knew nothing but gains year in and year out, this is now their 2008.

The question, of course, is what to do next. As always, there are only 4 options:

  1. Take more risk.
  2. Take less risk.
  3. Do nothing.
  4. Go to cash.

Doing 1 or 2 should always be a systematic decision. What has changed in your risk tolerance or strategy that warrants a change in your portfolio?

  • If nothing, which should be the case for most investors, then you have your answer: do nothing. As John Bogle of Vanguard says, “don’t do something, just stand there.”
  • If something, then you adjust only according to your pre-determined plan, and not because of an emotional impulse stemming from the recent declines.

The most tempting but also most dangerous option is always #4. You will hear many opportunists today suggesting that 2018 proves that diversfication “doesn’t work.” Ignore them at all costs. Making long-term portfolio decisions based on short-term market outcomes is not a recipe for success.

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Disclaimer: At Pension Partners, we use Bonds as our defensive position in our absolute return strategies for all of the above reasons. Bonds have provided a more consistent defensive alternative to ...

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