As we finish up April, the roller coaster has continued. While only a year ago I was quick to point out that the market only moved on interest rate considerations, make no mistake, the market is only moving on tariff considerations. Everything else can be pushed to the side. The final numbers through April show the following:
S&P – <5.10%>
NASDAQ - <9.51%>
MSCI EAFE – 10.79%
US Bond Market - 2.18%
The argument could be made that diversification is working this year. International stocks remain positive, as does the bond market. This has allowed us to effectively rebalance accounts (sell high, buy low) this year and reposition them moving forward. This is an interesting turn as diversification has been a drag on portfolios not just last year, but for the last decade. In fact, if you look at the chart below, the United States has significantly outperformed the world every year (with the exception of 2022) since 2010. That is a lonnnngggg time. I have had my portfolios very light international for years now and it has been a benefit. As always, I’ll continue to evaluate any strategic moves that make sense moving forward.
This also led me into a deeper evaluation of diversification in financial planning, not just in your investments. JP Morgan released their annual Guide to Retirement last week. It’s filled with excellent information, two of which I pulled for purposes of this blog. So where else can we find diversification. Most of you are familiar with the bucket concepts I like to utilize so let’s start with diversification of taxes. Not every dollar you earn, save or invest is created equal. In the below chart, you will see various financial instruments and the impact that taxes may currently have on each dollar generated.
I had an interesting discussion with a client last week about ROTH vs Pre Tax. While a ROTH is generally considered to be a superior strategy due to its tax- free nature, what if income tax rates change for the better in the future? For example, Trump (insert disclaimer that this is not a political statement) recently proposed eliminating income tax under a certain threshold. While I don’t expect that to come to fruition, if it did, then taking the deduction on a pre-tax IRA/401K now would have been the better decision. What I do know is that providing diversification in your taxable income will at least give you option in retirement.
How about diversification in your spending? When you do decide to retire, do you have control over what the market is going to do? Can you control that a global trade war was started 6 weeks after you were basking in the glow of your January retirement? Nope. But you can diversify your income sources. I think the below chart does a great job of showing various sources of income.
Specifically, covering your essential expenses with a combination of guaranteed income sources (social security, pension, annuity) can help alleviate a lot of the stress from market volatility. Having said that, being too conservative can impact your spending ability and/or legacy planning down the road. While cash alternatives have been attractive for a couple years, generating as much as 5% on a guaranteed basis, we have seen those rates drop recently. Over the next few years, my expectation is for them to drop further, forcing you into a decision between a guarantee and losing money to inflation. A properly constructed portfolio can answer multiple time horizons and planning considerations.
Which brings us back to today and questions about diversification in your investments. The United States has outperformed international stocks for the more than a decade as I showed you above. However, for the decade prior, commonly known as “The Lost Decade” in American investing, international stocks outperformed heavily. Since then, new investment options have hit the market in the form of REITS, liquid alternatives, crypto etc. Diversification works, but I don’t believe in building a portfolio and hitting snooze. Continuing to uncover ideas, understanding client needs and bringing best ideas and foresight to the table is what I do. If there is anything specific, you want to discuss please never hesitate to reach out. As always please feel free to share this with anyone who might benefit.