I’m not one to put much emphasis on judging trends across arbitrary time frames like “mid year” or a specific calendar year, but it’s still interesting to see how global trends are playing out relative to how people perceive they are. At the end of last year the Dow Jones Industrial Average (DIA) was all the talk since it was the biggest gainer. So far in 2014 that DIA has gained only 2.54%. So, we could say that, though its range of motion and swings (volatility) has calmed down lately. Over the past 6 months the Dow stocks have lost their momentum. Those who only listen to financial news about stocks may be surprised to hear the 30 year U.S. Treasuries as measured by TLT have been the biggest gainer this year at 12%. Gold (GLD) and Emerging Markets (EEM) have had the largest range of swings. The broad-based bond index (AGG), Commodities (GSG), and Developed Countries (EFA) have trended similar to the Dow. I included $VIX, the CBOE Volatility Index to point out several observations. Notice how it has generally trended down and is down -15% over the first half of the year, you may also notice how much more it spikes up and down. That is, volatility is volatile.
It’s important to understand that no intelligent person investors all their capital in stocks or in U.S. Treasuries or in Gold. Instead, they either allocate to many markets or rotate between them. The trouble with allocation to markets is they sometimes all go down at the same time, so diversification through just allocation may fail when you want it the most. That is why we rotate, instead of allocate, hoping to capture some of the good, and avoid most of the bad. No market trends up all the time and no strategy trends perfectly all the time, but the overall risk / reward profile is what matters. If someone can handle 50% declines and willing to wait 5 or more years to reach prior values, maybe they could invest all their money in stocks. We could say the same for commodities, real estate, and bonds. That is why we rotate, instead of allocate.
Have a great 4th of July!