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September 5, 2010 |     |
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Newsletters
Scarborough Portfolios Still Came Out Ahead With the start of the new decade, some commentators have looked back at the 2000’s and referred to it as “the lost decade.“ This comment is based on the 10 year return of the Standard& Poor’s 500 Index. The S&P 500 Index is comprised of the 500 leading companies in leading industries of the U.S. economy. It is widely regarded as a benchmark for the overall U.S. stock market. The 10- year average annual return for the index through the end of 2009 was -0.95%. Fortunately, those invested with Scarborough who followed the time-tested tenets of investing on which we educate clients, did not have a lost decade. The average annual returns over the past 10 years of Scarborough’s diversified portfolios as of December 31, 2009 are as follows:
Although these returns are lower than previous decades, the returns are much better than the S&P 500 Index alone. Despite including two severe bear markets, money was made during this past decade by using proven investment principles. These include: Diversification spreads your money among several types of investments within a portfolio. The rationale is to reduce overall risk because positive performance of some investments can help offset negative performance in others. The stock portion of Scarborough’s portfolios does not simply contain S&P 500 stocks. Instead, the stock exposure is diversified to include large, mid, and small cap stocks as well as international and real estate stocks. Also, the portfolios recommended to those in or close to retirement, include a significant amount of fixed income exposure. Staying the Course by keeping the nerve to stay invested during volatile times was important in achieving these returns over this past decade. When people move money out of stocks when the market falls, they often don’t put it back until long after the recovery begins. Missing out on the initial boost of the recovery can cost you whole percentage points in annual returns. Staying the course is also important for those using Dollar Cost Averaging, the practice of investing a fixed dollar amount at set time intervals regardless of market conditions. Active employees use this strategy by making 401(k) contributions through payroll. Others may have used this approach when entering into stock investments over the past few years. Those that kept making routine investments into the falling market bought more shares at lower prices and benefited more from the recovery than those that ceased investing in stock. Rebalancing is a way to maintain the risk / reward ratio that you initially chose for your investments. For example, assume that based on your initial goals and risk tolerance, you decided to invest in a mix of 40% stock mutual funds and 60% bond mutual funds. As time goes by, your portfolio will shift as market conditions impact the value of your holdings. You might drop to 30% stocks and rise to 70% bonds, or increase to 50% stocks and fall to 50% bonds. Whatever shift occurs, rebalancing involves selling or buying shares to return to your initial stock / bond ratio. Rebalancing involves trimming holdings by selling high and adding to holdings by buying low. This can help make sure that your portfolio continues to reflect your financial goals and tolerance for risk. Monitoring our recommended investments is another important aspect of achieving these returns. Our goal is to provide clients with a diversified line-up of top-performing, low-cost funds. If a fund underperforms over a period of time, we will recommend replacing it. Other times, we decide to add new asset classes. For example, to add further diversification, we are currently recommending the Pimco All Asset Fund. There are several benefits to adding the Pimco All Asset Fund to your account. The fund acts as a hedge against inflation by targeting solid after-inflation returns, aiming to surpass the Consumer Price Index by 5% per year over the long-term. Adding this fund designates a portion of your portfolio to be actively allocated depending on current economic factors across a range of traditional and alternative asset classes which can shift in and out of favor over time. Enhanced diversification is another benefit of adding this fund by investing in a variety of asset classes and strategies, which helps manage risk. If you would like to discuss this fund or have any questions regarding your account, please call our Retirement Planning Specialists at 800-223-7608. (Published: 5/20/2010) Back to Index |
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