August 2016 Market Insight
After strong gains in July, markets cooled off in August, with most popular indexes coming in relatively flat for the month. The one exception to this was the Russell 2000 (US small cap stocks), which returned 1.7% for the month and has been one of the top performing areas of the US this year.
If you had been invested solely in the Russell 2000 from January until today, your portfolio would be up around 10.23%, compared to 7.82% for the S&P 500 (US large cap stocks).
So why not invest whole-hog in the Russell 2000? The table below details the returns of various asset classes over the last 5 years, from safe bonds all the way to the more risky emerging market stocks. As you can see, the top asset class in a given year (listed in bold) rotates often, which is why it makes sense to take a disciplined, diversified approach to investing. This approach allows investors to smooth out returns over time and remain invested.
This does not mean that it’s never appropriate to concentrate a portion of a portfolio in a certain area. For example, it may be wise today to weight toward non-US stocks (MSCI EAFE), due to their recent underperformance. Maybe next year non-US stocks won’t be the top performer, but they certainly have better return prospects looking out over the next five years. As investors, it’s always wiser to weight our portfolios toward the areas that we see as having the best long-term return potential, while also maintaining a diversity across asset classes.
|Russell 2000||US Small||-4.18%||16.35%||38.82%||4.89%||-4.41%||10.23%|
|S&P 500||US Large||2.11%||16.00%||32.39%||13.69%||1.38%||7.82%|
|MSCI Emerging Markets||US Large||-18.17%||18.63%||-2.27%||-1.82%||-14.60%||12.53%|
|Barclays Aggregate||US Bonds||7.84%||4.21%||-2.02%||5.97%||0.55%||5.86%|
|MSCI EAFE||Intl. Developed||-12.14%||17.32%||22.78%||-4.90%||-0.81%||0.49%|