The S&P 500, the most widely followed stock index, is up 10.56% through the end of the third quarter of 2018. This is a good return for stocks, especially over nine months. It’s natural to conclude: the stock market is having a good year—my portfolio should also be having a good year. However, outside of the U.S. stock market, most asset classes are down this year.
Investors with a diversified asset allocation in 2018 have trailed the U.S. stock market. We believe over time it’s important to have a well-diversified portfolio. All asset classes have periods of strong and weak performance, but in the long term tend to produce returns commensurate with their respective risks.
Over the past 20 years, it’s clear that owning a diversified portfolio has worked very well. In fact, you only have to look back to 2017 to see the merits of a globally diversified portfolio.
Heritage differs from most U.S. stock-bond portfolios in a few important ways. The leading reasons Heritage’s performance is under U.S. stock-bond portfolios this year are as follows:
1. Heritage takes a global approach to investing and has as much money in international stocks as in U.S. stocks—and international stocks are down year-to-date.
2. Heritage tilts its international stock exposure to emerging markets—and emerging markets are underperforming developed international markets year-to-date.
3. Heritage complements its allocations to traditional stock and bond asset classes with alternative investments—and Heritage’s alternatives allocation is down year-to-date.
4. Heritage believes in a value-investing approach for the long run—and value stocks have underperformed growth stocks year-to-date.
Despite the headwinds with recent performance, we strongly believe in the merits of our long-term investment philosophy. We have positioned clients to generate strong risk-adjusted returns over time, although this will not play out every year.