THE JANUARY EFFECT

Asset allocation has regained its rightful place as the only game in town for strategic-minded investors, as January’s tally of performance among the major asset classes reminds.
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The range of returns was a robust 14.1 percentage points last month among the major asset classes. On top: foreign developed market bonds, which posted a 5.2% total return in January, by way of our proxy, the PIMCO Foreign Bond (Unhedged) D mutual fund. At the bottom was emerging market stocks, which shed 8.9%, as per iShares MSCI Emerging Markets ETF.
Long gone are the days when everything went up, which meant that the stakes tied to asset allocation and rebalancing were minimal. In 2008, the reverse is true and rising volatility and falling correlations among the major asset classes are the reasons. We expect no less going forward.
As the economic cycle turns, risk is reassessed and repriced on a case-by-case basis. Investors will become increasingly selective in weighing the potential outlook of bonds vs. stocks, domestic vs. foreign, commodities vs. equities, and so on. Such discriminating behavior fell on hard times during 2002-2007. But the fog is thicker than usual for gazing into the future, and investors are becoming more discerning.