Do I Really Need This Umbrella?

Last Edited by: LPL Research

Last Updated: June 12, 2024

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Marc Zabicki:

From December 31, 2009 through June 7, 2024, the S&P 500 Index has generated a total return of 533%. While the S&P 500 Growth Index has returned 661%. Over the same period, the S&P 500 Value Index has returned a comparatively primitive 389%, while the Bloomberg U.S. Aggregate Bond Index has shown only a 39% return. Is the case closed? Do we need value stocks and bonds or anything else but growth stocks in our portfolios any longer? Are there no more rainy days? In this latest edition of LPL Street View, we will provide our answer to this question. That answer will consider past history, some investment biases, and a direct contradiction to the fashionable investment question of the day. That is, is investment diversification dead? Given the 14.5 years worth of returns we just cited, the call to order seems rather simple. The rainy days are over.

Marc Zabicki:

There is no need to hang on to that awful umbrella and we should just buy U.S. large cap growth stocks with both hands. But before we embark on such a strategy, let's consider the 14.5 years prior to the period we just cited. If we go back to June 1995 through year end 2009, the S&P 500 Index returned 165%. The S&P 500 Growth Index was up 162%. But interestingly, the aggregate bond index and the S&P 500 Value Index held their own at 141% and 155%, respectively. The moral of the story, investment strategies should not be constructed using a rear-view mirror. A bias that is too often repeated by too many. Like many things, markets typically run in cycles and the latest trendy investment strategy proposition that diversification is no longer needed in portfolios, we believe is woefully misplaced.

Marc Zabicki:

Value stocks and bonds have had their day in the sun, and they will likely do so again. In fact, the heavy outperformance of equities broadly and growth equities in particular has us considering the likelihood that the next 15 years may be nothing like the last 15. So with that in mind, diversification should not be pronounced dead, and as equities eventually revert a bit to the mean, diversification could be decidedly important in the years ahead, especially as trend growth in the U.S. economy, slows and fiscal and monetary policy are seemingly positioned for a more prominent place in this economy. Where do you go for diversification? Well, the bond market for one, starting yields are attractive and the time to own bonds begins at just about the time they are the most unloved that time would be about now. Another important investment vehicle to consider is alternatives. If we are right, that volatility could rise in the coming years, some alternatives can offer uncorrelated performance and volatility buffering just at the time when it is needed most. The best time to consider alternative exposure is now when volatility is indeed low. Remember, keep that umbrella handy. Ensuring for a rainy day usually turns out to be a good strategy. Thanks for listening, and as always, allocate wisely.

 

In the latest edition of Street View, LPL’s Chief Investment Officer Marc Zabicki, discusses embracing a concentrated growth equity portfolio. The S&P 500 Growth Index outperformed other indexes in the past 14.5 years, but past performance does not guarantee future results. Markets run in cycles, and value stocks and bonds have historically outperformed during certain periods. Diversification should not be considered dead, as it can be important during periods of market volatility. The bond market is an attractive investment option due to starting yields and the potential for rising interest rates. Alternative investments can offer uncorrelated performance and volatility buffering during times of market stress.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth in the podcast may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. All indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

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All index data is from FactSet.

Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

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