Do I Really Need This Umbrella?

Marc Zabicki:

From December 31, 2009 through June 7, 2024, the S&P 500 Index has generated a total return of 533%. While the S&P 500 Growth Index has returned 661%. Over the same period, the S&P 500 Value Index has returned a comparatively primitive 389%, while the Bloomberg U.S. Aggregate Bond Index has shown only a 39% return. Is the case closed? Do we need value stocks and bonds or anything else but growth stocks in our portfolios any longer? Are there no more rainy days? In this latest edition of LPL Street View, we will provide our answer to this question. That answer will consider past history, some investment biases, and a direct contradiction to the fashionable investment question of the day. That is, is investment diversification dead? Given the 14.5 years worth of returns we just cited, the call to order seems rather simple. The rainy days are over.

Marc Zabicki:

There is no need to hang on to that awful umbrella and we should just buy U.S. large cap growth stocks with both hands. But before we embark on such a strategy, let's consider the 14.5 years prior to the period we just cited. If we go back to June 1995 through year end 2009, the S&P 500 Index returned 165%. The S&P 500 Growth Index was up 162%. But interestingly, the aggregate bond index and the S&P 500 Value Index held their own at 141% and 155%, respectively. The moral of the story, investment strategies should not be constructed using a rear-view mirror. A bias that is too often repeated by too many. Like many things, markets typically run in cycles and the latest trendy investment strategy proposition that diversification is no longer needed in portfolios, we believe is woefully misplaced.

Marc Zabicki:

Value stocks and bonds have had their day in the sun, and they will likely do so again. In fact, the heavy outperformance of equities broadly and growth equities in particular has us considering the likelihood that the next 15 years may be nothing like the last 15. So with that in mind, diversification should not be pronounced dead, and as equities eventually revert a bit to the mean, diversification could be decidedly important in the years ahead, especially as trend growth in the U.S. economy, slows and fiscal and monetary policy are seemingly positioned for a more prominent place in this economy. Where do you go for diversification? Well, the bond market for one, starting yields are attractive and the time to own bonds begins at just about the time they are the most unloved that time would be about now. Another important investment vehicle to consider is alternatives. If we are right, that volatility could rise in the coming years, some alternatives can offer uncorrelated performance and volatility buffering just at the time when it is needed most. The best time to consider alternative exposure is now when volatility is indeed low. Remember, keep that umbrella handy. Ensuring for a rainy day usually turns out to be a good strategy. Thanks for listening, and as always, allocate wisely.