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4th Quarter 2013 Market Commentary

The US stock market pleasantly surprised everyone in 2013.  The S&P 500 Index experienced a record year. International stocks also had strong year, although emerging market stocks were down and trailed global stock markets significantly. Interest rates rose in 2013, causing negative returns for the bond market. Emerging market bonds, following a strong 2012, fell further than domestic bonds. Alternative investments were a mixed bag.  Global real estate was up slightly, while commodities were down due to weakness in gold, agriculture, and industrial metals. Of course calendar years are arbitrary measures for long-term investors who do not buy in on January 1st and sell on December 31st, but they do serve as convenient time periods for reflection and review of market performance.

Human nature dictates that we gravitate towards that gleaming return of the S&P 500 Index last year. We are tempted to measure our success against this number. How quickly we forget the reason we choose diversification in the first place! Remember the discussion about not “putting all of your eggs in one basket”? Let’s assume you were invested in a portfolio comprised only of the S&P 500 Index, and compare it to two hypothetical portfolios; a properly diversified 60/40 (moderate risk) portfolio and an aggressive portfolio of global stocks. We will compare an investment of $100,000 on January 1, 1995; one portfolio contains only the S&P 500 Index, one is globally diversified portfolio with 60% in global stocks and 40% in bonds, and the third is a globally diversified portfolio with 100% in stocks.[1] Read more