Even if we shorten the time period up to the current year, we can make a number of simple observations:
1. You were disappointed again by your international positions. Unhedged positions in popular ETFs like iShares MSCI Japan (EWJ) and Vanguard FTSE All World ex U.S. (VEU) lost money.
2. U.S. large-caps as tracked by the Dow and S&P 500 are maintaining admirable gains on the year. Yet U.S. small caps as tracked by the Russell 2000 are flat through 12/15/2014.
3. High yield corporate bonds have fallen off the proverbial cliff. Granted, most of the decimation in the sector can be attributable to 15%-20% exposure to energy company debt, where rapidly declining oil prices are killing oil producing pure plays. On the other hand, rare is the circumstance where comparable U.S. treasuries in a fund like iShares 7-10 Year Treasury (IEF) will impressively win the demand game over corporate high yield in a fund like iShares High Yield Bond Fund (HYG), especially when signs had been pointing to an economic resurgence in the U.S.
As recent as 2011, the 44th economy in Greece nearly rocked the entire world’s financial system. The explanation? The world is far more interconnected than it has ever been in history. Lately, however, talking heads have been trying to explain how the U.S stock market has avoided three years of corrective activity while Rome (and the whole world) burns. Their conclusion? We are not so dependent on world issues or global economic concerns anymore. After all, they say, we are practically energy independent.
Does this really sound practical? Is the U.S. really an island? Or is the U.S. stock market the primary beneficiary of worldwide central bank stimulus, the yen carry trade and frustrating results in virtually every other asset class? I believe it is the latter. Commodities, China, energy, basic materials, junk bonds, U.S. small caps, Europe, Brazil, Japan, foreign currencies – they’ve all been losers. That leaves U.S. large company for the money, until that move wears out its welcome too.
I am not bearish on U.S. large caps. Nevertheless, I believe in multi-asset stock hedging and/or a barbell approach for risk-adjusted success. Even if a bear should finally roar, I have plan in place for minimizing the bulk of the downside. I suggest that you make sure that you have a proactive approach for dealing with a bear as well.