In May of 2015, the US stock market reached record highs. Then, for the first time since 2011, a sharp correction began in August and continued in September. From there, the stock market never fully recovered. By the end of 2015, the Dow Jones Industrial Average was down 2.2%. The S&P 500 was down 0.7%. The NASDAQ was the bright spot with a gain of 5.7%.
The losses were frustrating, but not unexpected, as the bull market in stocks has aged. US economic growth is slow and fragile, as is economic growth around the world. In this setting, lower return expectations are recommended. As 2016 begins, a careful review of your IRA contribution data for 2015 is time well spent. At ASG, we stand ready to help you identify shortfalls. A prior year contribution is allowed up until the April 15 tax deadline. One sure way to offset a low return environment is simply to raise your savings rate.
A position in bonds provided a cushion to the aforementioned stock market downside, with the notable exception of some high yield products (which were clobbered). At ASG, we often promote a balance of stocks and bonds in portfolio design. However, what with historically low interest rates since the Great Recession, the safety of bonds is less robust than it used to be. In fact, bond prices may fall as the Federal Reserve slowly raises interest rates. They did so for the first time in almost 10 years in December.
Predicting the future price movements of stocks, bonds, and commodities has always been exceedingly difficult and many well-known hedge fund managers and traders found themselves on the wrong side of trades in 2015. Asset allocation and broad diversification are time tested principles of money management and any experiment with alternatives is best limited to a small percentage of your hard won net worth.
Of course, cash continues to play a vital role in money management even though it is yielding virtually nothing. At ASG, we recommend two years of living expenses (held in cash at your favorite local bank) for those who are nearing retirement. For conservative investors, a 5-10% cash position held in investment portfolios adds an extra layer of stability.
We urge you to keep sight of your financial goals in 2016. Despite a lower return forecast, the founder of Vanguard, Jack Bogle, recently said, “Invest we must.” Happy New Year!