International Improvement

 | Sep 06, 2013 | 4:00 PM EDT
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I've written lately about investor fears of fixed income and emerging markets, but if U.S. large-caps shone the first half of the year, international stocks are picking up some of the slack these days.

Though you want exposure to a range of asset classes at all times, it's imperative to tactically rebalance. While I advocate for a portfolio with a long-term perspective, this should in no way, shape or form be confused with buy-and-hold.

The reality of the old buy-and-hold is that it translated to "buy and forget about." We've all been regaled with stories about Grandpa (our own or someone else's) who bought shares of DuPont (DD).

After a particularly poor performance in June, fixed income held its own in the ensuing months. For the literal minded, that means the free fall was shored up, and bonds performed better than the S&P 500, which most Americans mistakenly call "the market."

While the S&P is termed the "benchmark" index for stocks, the fixed-income analog would be the Barclays Capital Aggregate Bond Index, usually shortened to "the Agg." The index was down 0.52% in August, a far better performance than that of the S&P 500, which saw a decline of 2.9%. (Note: That S&P figure reflects total return, meaning dividends are factored in. Minus dividends, the S&P showed a price decline of 3.1%.)

But just like it's important to use fixed income as a way to provide ballast for a portfolio and to dampen the effects of equity volatility, it's also key to include non-U.S. stocks, and stocks of varying market caps.

In August, the MSCI World ex USA Small Cap Index showed a decline of 1.03%. Yes, most of us prefer gains, but index declines are a normal part of market cycles. Investors and traders who expect nothing but up month in and month out eventually miss out on bull cycles because their unrealistic expectations have pushed them out of investments altogether.

For purposes of comparison, let's look at an ETF that tracks performance of the MSCI ACWI ex USA Index. The SPDR MSCI ACWI ex-US ETF (CWI) is a good proxy for that index. As with bonds, emerging markets also got hit hard in June, sending many investors and traders scurrying for the exits.

But there's a similar trend at work when it comes to the stabilization in the following months: The ETF showed a price decline of 1.5% in August, and the still-young month of September is up 2.6%.

The point is: Different asset classes log differing performance stats over time. It's tempting to try second-guessing the indices, using technicals or, worse, opinions and punditry to time entries and exits. But the historical data clearly show that ongoing exposure to different asset classes, adding and subtracting to holdings depending on global market developments, delivers reliable portfolio returns over time.

Remember: More than three quarters of active fund managers, who have research staffs and vast numbers of sophisticated analytical tools at their disposal, cannot beat their benchmark indices on a consistent basis. It's sheer folly to believe that the majority of do-it-yourselfers have the skill set to beat the pros at their own game.



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