“For the loser now will be later to win, For the times they are a-changin’” – Bob Dylan
At the beginning of this year (click here and here), we cautioned investors against abandoning all asset allocation and risk management principles in chasing the unusual 2013 performance in US equities. It is no secret that many investors, both retail and institutional, cannot resist the urge to chase recent performance, especially when that performance becomes parabolic. Unfortunately for these investors, this has never been a successful investment strategy. Of all the behavioral biases, recency bias is certainly the most pernicious in the investment world.
We’re seeing that in full effect this year as evidenced by the table below which compares 2013 returns with 2014 returns. With the exception of high yield bonds (HYG) which advanced last year and have posted gains so far this year, 2014 is literally the inverse of 2013.
Everything that was in vogue in 2013 has been sold thus far in 2014. That group includes U.S. stocks (SPY, IWM) and Bitcoin. The sectors and industries that were most loved, including the Biotechs (XBI), Consumer Stocks (XLY), and Social Media Stocks (SOCL), have sold off the hardest.
On the other side of coin? Everything else because everything else was down in 2013. This group includes Bonds (BND), Commodities (DBC, GLD, SLV), Miners (GDX, GDXJ), REITs (ICF, REM), Preferred Stocks (PFF), Emerging Market Bonds (EMB), Frontier Markets (FRN), and Emerging Market Equities (EEM).
In total, there is negative correlation of -.82 between asset class returns in 2013 and asset class returns in 2014.
Score this as another win for asset allocation, rebalancing, risk management and prudence, all of which were deemed obsolete following 2013.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.