Through Friday, December 10, 2021, the global capital markets have shown a bumpy ride. Amidst the global pandemic, supply chain impacts, governmental and Fed responses, and resultant economic effects, we have seen very volatile, and varied, results.
Per the chart below of the five major asset classes, U.S. large cap stocks (IVV), U.S. small cap stocks (SCHA), developed markets (SCHF), emerging markets (SCHE), and U.S. core bonds (SCHZ), you can clearly see the dispersion of returns. In the equity universe, U.S. large cap stocks are the big winner so far in 2021 with a robust +27.2% return (the green line at the top) and emerging market equities the big loser with a 0.0% return (yes, 0.0%!). In the bond space, U.S. core bonds lagged with a -1.8% total return.
As has been the case over the last three years, diversification has mostly hurt portfolio performance because U.S. large cap stocks have been the undisputed top cumulative performer with all other asset classes lagging, often by a LOT! Diversifying positions in international and emerging markets has been a drag, as has any exposure to core bonds.
As we have said here many times, bonds have been a bad bet to make recently purely due to the math! Historically low interest rates provide almost no yield and very little potential for bond price appreciation. Recognizing this fact, D&A client accounts that can afford to take more risk have been underweighted bonds by up to 10%.
All is not lost, however! Even with diversification being a drag on performance, a naïve diversified portfolio with a 60% equity and 40% bond weighting like the iShares Core Growth ETF (AOR) has generated a total return of +10.43% so far in 2021. This is strong portfolio performance that exceeds the current inflation rate and carries much less risk than a 100% equity portfolio. Of course, past performance is no guarantee of future returns! As we all know, markets can turn on a dime and disappoint! Best to ensure that your risk profile is consistent with your objectives and you are invested accordingly to achieve your goals.