The first quarter of 2013 was a very strong one for the equity markets. US stocks led the way with returns of 12.4% for the smaller company stocks in the Russell 2000 and 10.6% for the larger companies in the S&P 500. The performance of the international markets was not as strong; Europe continued to struggle and the effects of the Cyprus bailout were felt across the continent. The EAFE index, which measures performance of developed markets outside the US, was up 5.3%, while emerging markets were down 1.8%. In the continued low interest rate environment, bonds were essentially flat for the quarter. REITS (Real Estate Investment Trusts) also had a strong quarter and were up 8.1% while commodities were down 1.8%.
As the economy continues to improve, the Federal Reserve’s actions to keep interest rates low have had a strong influence on the record breaking stock market rally. Many economists are concerned the Fed is painting itself in a corner by doing so much to keep rates low. While the unemployment rate is still high, we have recovered ¾ of the jobs that were lost during the recession. Low interest rates continue to be a concern for bond investors but fixed income remains an important part of a well balanced portfolio. There are many areas of the fixed income markets that offer less correlation to the benchmark 10 year Treasury. Having a diversified fixed income portfolio is just as important as being diversified on the equity side.
As we always see in times when one asset class performs better than others, it is very important to reassess your asset allocation. If your allocation to equities has gone well above your target, you may be taking on more risk with the portfolio than you originally intended. As hard as it can be to sell an asset class that is doing very well, it is the right thing to do if you want to keep your risk level consistent. As you look at the 10 year return charts attached, you can see clearly that over the past decade investors have been rewarded for taking risk. Riskier asset classes have the best longer term returns, despite the short term ups and downs.
If you’d like us to take a look at your portfolio to see if any rebalancing is in order, feel free to contact us at 410-494-6680 or send us a quick e-mail.