2015 1st Quarter Commentary

The Case for Diversification

The 4th quarter of 2014 and the 1st quarter of 2015, when taken together, show a good example of the value of diversification.  During October, November, and the first part of December the price of crude oil dropped precipitously.  This unusually large drop in the price of oil effected many parts of the market.  However, the three market sectors hit the hardest were:

– Foreign Stocks in Industrial Nations
– Foreign Stocks in Emerging Countries
– S. High Yield Bond Market

We believe one reason the drop in oil prices effected foreign markets so much is that many foreign countries rely heavily on the sale of their natural resources for revenue.

                                                                  4th Quarter 2014       1st Quarter 2015

Dow Jones Industrial Average*                       +5.2%                         -0.26%

S & P Index*                                                      +4.93%                      +0.95%

EAFE Index*                                                       -3.14%                       +6.42%
(European, Australian & Far East)

 

Please note that during the 4th Quarter of 2014, the Dow Jones and the S&P indexes were both up while the EAFE Index (One of the most commonly followed foreign stock indexes.) was down -3.14% for the quarter.  At times like this, many investors are tempted to shift assets away from the struggling sector and into the areas currently doing well.

However, if you look to the part of the chart showing the 1st Quarter of 2015, you will notice that the Dow was down -0.26%, and the S&P was up only +0.95%, while the EAFE Index was up +6.42% for the quarter.  It is quite common for market sectors to over-react to sudden, surprising developments that get lots of news coverage.  When this happens, sometimes a market sector can bounce back quite quickly.  The foreign Emerging Market Stock sector and U.S. High yield Bond sector seem to be recovering more slowly.

The markets have been very volatile over the last two quarters.  In our experience, during times like this, it is best to stick with your diversified portfolios and stay within your risk tolerance.  Warren Buffet, one of the best investors of all time, has said one of the most important traits of a good investor is patience.

*Indices mentioned are unmanaged and cannot be invested into directly.  Past performance is no guarantee of future results.  Diversification and asset allocation strategies do not assure profit or guarantee against loss.
Sources: T. Rowe Price 4th Quarter 2014 Market Wrap Up, the Wall Street Journal, and the MSCI performance website.
These are the opinions of Financial Professionals and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice