Why Has My Portfolio Performed so Poorly?

December 16, 2018

By Martin Krikorian

As we enter the final two weeks of the year, 2018 has been a frustrating year for investors. From Jan. 1 to Sept. 21, the U.S. stock market gained 9.7 percent. Since then, the U.S. stock market has fallen 11 percent.

As a result, the U.S. stock market (as of Dec. 10) is down 1.3 percent. In addition, U.S. Large stocks, U.S small stocks, and International stocks have lost 3.5 percent, and 13.6 percent respectively in 2018. As if this wasn’t frustrating enough, the U.S. bond market has also had a difficult year, losing 1 percent. However, the negative performance of these asset classes in 2018 has been a rare occurrence.

The accompanying chart shows the annual returns of U.S. large stocks, U.S. small stocks, international stocks, and U.S. bonds from 2000-2018. In 2018, all three asset categories of stocks as well as the U.S bond market earned negative returns. During the previous 18 years from 2000-2017, there was never a year when all four asset categories lost money.

In fact, U.S. stocks, International Stocks, and the U.S. Bond market have never all lost money in the same year, over the last 40 years.

As a result of these negative returns, individuals holding a portfolio equally diversified between U.S. large stocks, U.S. small stocks, and International stocks, have lost approximately 6.7 percent. Investors holding a more conservatively diversified portfolio of 50 percent stocks and 50 percent bonds have lost approximately 4 percent. With these negative returns many investors may be asking themselves; “Does diversification still make sense?” At Capital Wealth Management, we believe the answer is yes.

While diversification has not been very helpful to investors in 2018, history does show that over the long term, a diversified portfolio can reduce portfolio volatility and risk. What many investors fail to consider is that the long-term is made up of many short-term periods. And during these short term periods, diversification may not always provide the results investors like. Reviewing historical asset class returns has proven time and time again that markets are cyclical, and that the investment pendulum eventually swings back in the other direction. The problem is that nobody knows with any real certainty when this is going to happen. It’s easy to look back over a given period of time to see which asset class was the best performer. Unfortunately, you can’t buy past returns, only the future’s. And diversification is still one of the most effective investment strategies to help protect your retirement savings from an unknown future.

Martin Krikorian is president of Capital Wealth Management, a “fee-only” registered investment adviser located at 9 Billerica Road, Chelmsford. He is the author of the investment books, “10 Chapters to Having a Successful Investment Portfolio” and the “7 Steps to Becoming a Better Investor.” Martin can be reached at 978-244-9254, Capital Wealth Management’s website; www.capitalwealthmngt.com , or via email at, info@capitalwealthmngt.com .

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