April 2017 - Defining "The Market"

Investors alternatively express concern and exuberance about “the market.” At the end of 2016 and coming into 2017, “the market” was doing just fine and most investors felt enthusiastic. But in March and April, many investors seem to perceive the market to be “going sideways.” That is because most investors consider the market to be a major U.S. index, such as the S&P 500 or Dow Jones Industrial Average. As of this writing, the S&P 500 has been slightly negative since March 1.

However these broad U.S. stock market indexes are not necessarily indicative of overall portfolio returns. Our sample moderate portfolio, for example, holds 30% in U.S. stocks, and most of that is tilted toward small cap and value shares. This sample portfolio also includes significant international and fixed income holdings, among other asset classes. (See page 26 for sample portfolios). So when the market is up, down, or sideways, prudent investors will not necessarily be in the same boat.

We’ve been hearing for years about the “unsustainability” of market highs. Investors are rightly concerned about whether U.S. stocks will lose value. After all, stocks are always a risky investment. That’s what drives their expected return premium.

But investors with a moderate, diversified portfolio would be remiss to fixate on the U.S. stock market. In particular, international stocks and gold have buoyed returns year-to-date. Developed and emerging international stocks have been slightly positive since March 1. Even if “the market” defined by U.S. stocks goes sideways or down for a period, fixed income, international holdings, real estate, and gold all have the potential to do something different.

For long-term investors who rebalance regularly to target portfolios, changing relative price levels among asset classes provide opportunity. While it is human nature to be concerned with falling prices, those who fail to look beyond major U.S. stock market indexes may be shortsighted when it comes to their overall portfolio.

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Also In This Issue:
The Cape Ratio Approaches 30
Are Small cap and value Stocks Still Worth Pursuing?
Greenspan on Gold
The High Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked by Yield
Recommended Investment Vehicles

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