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Looking at the Full Picture: A Look at the First Half of the 2013 Investment Year

July 9, 2013

It is very common for an investor to fixate on an index as a performance comparison to their portfolio.  This familiar mistake often leads investors to chase returns or change their risk parameters if their portfolio is not performing as well as the compared index.  This can lead to disastrous results!!!

Many investors compare their portfolios to the S&P 500 Index.  The S&P 500 is representative of U.S. large-cap stocks.  It is a meaningful benchmark against which to measure the movements of the large-cap U.S. stock market.  But it’s not the full picture, and in many cases it may not be the most suitable index against which to compare your portfolio.  Why would you compare your portfolio to the S&P 500, unless you were invested 100% in large, domestic stocks?  In a year like 2013, you did not come close to matching the results of the S&P 500 unless you were fully invested in domestic stocks.

The U.S. economy represents a little less than 22% of the world’s economy.  Sixty percent of ETFs representing the markets of the top twenty economies (which represents 80% of the total world economy) produced negative returns.  Almost every bond ETF that we track (domestic and international) has produced negative returns for the year.  Domestic REITs are barely up, but have retreated significantly from their highs in May.  International REITs are down.  The commodities ETF that we track is down -6.90% for the year.  Commodities focused in precious metals, like gold and silver, are down much more significantly.  For example, the gold ETF (GLD) is down -27% for the year and the silver ETF (SLV) is down -37.55%.

As an exercise, I decided to calculate what the return would be if an investor had invested in a diversified portfolio of ETF’s.  I assumed two-thirds of the investor’s equity exposure would be invested in the S&P 500.  The other one-third would be equally invested in all available ETFs for the top eighteen economies (excluding Saudi Arabia because there isn’t an ETF in which to invest).  I decided to use the 7-10 year Treasury ETF as an average investment in bonds.  The returns are as follows:

80/20 Stock to Bond Allocation:                  4.37%

60/40 Stock to Bond Allocation:                  2.21%

40/60 Stock to Bond Allocation:                  0.06%

20/80 Stock to Bond Allocation:                  -2.10%

Clearly, this last year has been challenging for highly diversified portfolios.  However,   we will continue to identify the best places for us to invest your portfolio, while balancing the risks of doing so.  We strongly believe in the virtues of a highly diversified portfolio and the benefits gained by investing this way.  If, however, you are interested in moving into a domestic only strategy, please call us to discuss our strategies.  Polaris manages three domestic stock strategies that are not directly invested in the international marketplace.

As always, I welcome all calls and comments.  Please feel free to call or write.  Below, I have also included the details of the top 20 economies and the corresponding country ETF performance, as well as the bond ETFs that we track.

Sincerely,

Jeff

Top 20 Economies & ETF

     

(size in trillions)

% of World

6/30/2013

  Country

ETF

Economy

Economy

YTD Returns

1

US

SPY

15.686

21.88%

12.60%

2

China

FXI

8.227

11.47%

-17.48%

3

Japan

EWJ

5.963

8.32%

15.57%

4

Germany

EWG

3.400

4.74%

1.75%

5

France

EWQ

2.608

3.64%

1.20%

6

UK

EWU

2.440

3.40%

-0.11%

7

Brazil

EWZ

2.395

3.34%

-20.08%

8

Russia

ERUS

2.021

2.82%

-16.49%

9

Italy

EWI

2.014

2.81%

-10.39%

10

India

INP

1.824

2.54%

-9.79%

11

Canada

EWC

1.819

2.54%

-6.87%

12

Australia

EWA

1.541

2.15%

-8.03%

13

Spain

EWP

1.352

1.89%

-6.94%

14

Mexico

EWW

1.177

1.64%

-6.90%

15

S. Korea

EWY

1.155

1.61%

-17.13%

16

Indonesia

IDX

0.874

1.22%

1.01%

17

Turkey

RUT

0.794

1.11%

-8.84%

18

Netherlands

EWN

0.773

1.08%

2.93%

19

Saudi Arabia

N/A

0.727

1.01%

10.22%

20

Switzerland

EWL

0.632

0.88%

9.22%

Average Performance of the 18 Country Specific ETFs:                                 -5.41%

Top 20 Countries Economies:                  57.422              80.08%

The Total World Economy:                       71.707

As I stated earlier, the bond market has also taken its lumps.  There were very few places to find positive returns.  Those that had positive returns gave up much of their performance over the last six weeks of the quarter, as almost all bonds dropped in value due to comments made by Ben Bernanke and other Federal Reserve Presidents.

Performance of Bond ETFs 

   

6/30/2013

Bond ETF

    Symbol

YTD Returns

1 -3 Year Treasuries

SHY

-0.06%

3 - 7 Year Treasuries

IEI

-1.18%

7 - 10 Year Treasuries

IEF

-4.26%

10 - 20 Year Treasuries

TLH

-5.64%

20+  Year Treasuries

TLT

-8.57%

Inflation Protected Treasuries

TIP

-7.42%

Investment Grade Corporates

LQD

-4.93%

Aggregate Bond Index

AGG

-2.52%

National Municipal Bonds

MUB

-3.04%

High Yield Bonds

HYG

0.31%

International Government Bonds

IGOV

-5.46%

Emerging Markets Sovereign Debt

PCY

-10.83%

International Inflation Protected Bonds

WIP

-8.03%

Preferred Stock

PFF

1.19%

       

Average Performance                                                                                   -4.32%

Categories: Polaris Greystone Financial Group, LLC.

Tags: 2013, Economy, ETFs, Investments, Investments 2013, S&P 500

 

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