Turmoil from geopolitical tension and economic confusion may be weighing on the global economy, but you wouldn’t know it by looking at returns of late. Indeed, risk became popular again in July, as the chart below illustrates.
Asset class proxies: Vanguard REIT ETF, iShares Russell 2000, iShares MSCI Emerging Markets, MSCI EAFE, S&P 500 SPDR, Vanguard High-Yield Corporate, PIMCO EM Bond, Morningstar Short Gov’t Category, PIMCO Foreign Bond, iShares Lehman Aggregate Bond, Vanguard Inflation Protected Securities Fund, Credit Suisse Commodity Return Strategy Fund.
The top-performing asset class over the past month through last Friday was emerging market equities, based on Morningstar data for iShares MSCI Emerging Markets Index ETF. Not even the perennially strong REITs sector could match emerging markets’ recent comeback after losses in May and June. Of course, REIT investors probably aren’t complaining, having scored the second-best rise for the past month with a 7.4% total return, based on the Vanguard REIT Index ETF. In fact, REITs are still the leader in 2006, with a year-to-date total return of nearly 18%–far and away the best performance this year.
Perhaps more striking is the fact that there’s nary a sign of red ink on our performance tables, save for the tiny loss posted by inflation-indexed Treasuries so far this year, as per Vanguard Inflation-Protected Securities fund. Otherwise, it’s been onward and upward across the board, at least by our somewhat narrow view of performance time frames.

This is a bit odd, however, since the point of diversification is to weather storms by exposing assets to corners of finance that zig when others zag. But if everything’s zigging (albeit in varying degrees) what’s the point of emphasizing zag? Good question, and based only on one-month and YTD numbers, the answer’s not all that compelling.
One intrepid reader recently chastised us for daring to suggest that maintaining a widely diversified portfolio was less than optimal when it comes to deploying capital (his actual words weren’t quite as technical and a tad more colorful). REITs and foreign stocks, our enthused reader advised, were the only place to be. The implication being that an enlightened investor should dispense with the nonsense of owning other asset classes until and if they showed signs of delivering stellar returns.
Our reaction was a bit boring, but at least it was consistent: we attempted to explain that over longer-term periods, the benefits of diversification tend to shine, as we observed in our own unscientific study in a post back on March 7. We’re hardly the first to observe the value of owning multiple asset classes, but we’re second to none in praising the associated merits. And in a world where tapping various asset classes is easier and more affordable, it only seems rational to avail oneself of strategies formerly available only to wealthy and individual investors.
Of course, there are no guarantees with investment strategies, even with broad asset allocation strategies. That said, we continue to harbor more than a little faith that such thinking will do quite nicely over time. Yes, you could get richer quicker with a more aggressive approach, although you could get poorer in no time as well.
Owning ten asset classes is first and foremost about wealth preservation, immersed with a health dose of capital growth. Or so we believe, based on a number of years of pondering the alternatives and studying the numbers. In a world where the future seems to become more uncertain by the week, we cling to our ten, over three or four, like a man does to a life preserver who finds himself somewhere in the Atlantic.
Ah, but what if you have a taste for something racier? Not to worry. For those inclined to emphasize capital growth over wealth preservation, owning a mix of the ten asset classes still holds potential. It’s all a matter of how one goes about weighting the individual pieces and the frequency of rebalancing. God and the devil, one might say, are in the details of mixing the ten asset classes. In sum, you can dial up a wide, wide variety of expected risk/return levels by sticking ten asset classes. For our money, this is an investment chassis that can be attached to a broad variety of investment engines.
Speaking of risk, we think it will rear its ugly head in more tangible terms in the capital markets in the weeks and months ahead. In other words, don’t let the easy gains across the board this year lull you into a false sense of bullish security.
Yes, Virginia, there’s always a bull market somewhere, but there’s rarely a bull market everywhere for more than a brief, fleeting moment in time. As such, we’ll continue to sleep with one eye open and an overweight allocation in cash, to be deployed later when (we predict) bargain prices prevail elsewhere in more robust terms.
Meanwhile, we now return you to the bull markets in progress….