The Ramifications of Extrapolating Recent Investment Trends

A diversified portfolio with balanced exposure to various asset classes constructed in consideration of an investor’s risk tolerance, return requirements, time horizon, tax situation, legal issues, and liquidity needs is most often the best approach.


Equity investors were exuberant in 2007 as they interpreted robust near-term historical returns (from 2003 to 2007) as a sign that outperformance would continue in the future. This line of reasoning did not end well. In early 2009, anticipating continued declines in equity markets, investors “hid” in bonds, and watched from the sidelines as equities climbed a “wall of worry.”


In early 2009, anticipating continued declines in equity markets, investors “hid” in bonds, and watched from the sidelines as equities climbed a “wall of worry.”


Heading into the year 2000, investors like Warren Buffett were oft-criticized for staying true to their value mantra and avoiding investments in speculative technology stocks. Investors “climbed over each other” to buy tech as they anticipated continued outperformance.


Gold was left for dead during the stock market rally of the late 1990s. The metal subsequently outperformed stocks by more than 600% over the following 12 years.


In the latter part of the decade, coming out of the Great Recession, the media exalted gold, pointing to strong near-term historical returns and the need for defensive posturing. Investors caught the “gold bug” and piled into the precious metal as equities were shunned. Subsequently gold lost nearly 40% of its value while equities rallied sharply.


As 2013 came to a close, the U.S. economic recovery was tepid but progressing well. The Fed was expected to end QE in the near future and raise rates soon thereafter. With the yield on the 10-year U.S. Treasury near 3%, the overwhelming consensus was that “rates have nowhere to go but up.” One year later, in a post-QE world, yields are much lower.


After four years of strong international and emerging market equity returns, investors questioned the value of holding U.S. stocks at all.


Subsequently, U.S. stocks outperformed both international and emerging markets stocks by more than 50%.


U.S. stocks have gained more than 200% since March 2009, outperforming most other asset classes. Such outperformance has caused sentiment to shift dramatically in favor of domestic stocks. Looking at their monthly statements, investors may be wondering “why shouldn’t I just put all of my money in U.S. stocks?”

With U.S. stocks at all-time highs, having generated returns well in excess of historical averages in the past half-decade, now may very well be the time to regard U.S. equities with caution rather than exuberance. As exhibited by U.S. stocks in late 2007, U.S. bonds in early 2009, U.S. technology stocks in the early 2000s, gold in 1999 and 2011, U.S. Treasuries in 2014, and international and emerging market equities in 2007, the ramifications of extrapolating recent investment trends is a misguided approach that often leads to disastrous investment results. Uncertainty is a given in investing, and nobody knows what the future holds for asset class returns.

This market commentary was written by Daniel Cohen, a member of the Investment Team at Summit Equities, Inc., Member FINRA/SIPC, and Summit Financial Resources, Inc. The investment and market data contained in this commentary is not to be deemed an offer, solicitation, endorsement or recommendation to buy or sell any general or specific product, service or security and is not intended to constitute investment advice. Indices are unmanaged and cannot be invested into directly. The following indices are often referenced in our market commentaries: Standard & Poor’s 500 Index (S&P 500), an unmanaged group of securities considered to be representative of the stock market in general; Barclays Capital U.S. Aggregate Bond Index, a market capitalizationweighted index comprising Treasury securities, Government agency bonds, Mortgage-backed bonds, corporate bonds, and some foreign bonds traded in the U.S.; NASDAQ Composite Index, measures all NASDAQ domestic and international common stocks listed on The NASDAQ Stock Market and is considered to be representative of technology stocks; The Gold London AM Fixing Price Return Index is an unmanaged index published by Kitco, Inc. that is widely used as a pricing medium for gold by producers, consumers, investors and central banks; The MSCI EAFE Index is a free float adjusted market capitalization weighted Index designed to measure developed market equity performance and is composed of companies representative of the market structure of Developed Market countries. The Index includes reinvestment of dividends, net of foreign withholding taxes; The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. Past performance does not guarantee future results. Source of performance: Morningstar®. Information throughout this commentary, whether stock quotes, charts, articles, or any other statement or statements regarding market or other financial information, is obtained from sources which we, and our suppliers, believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither we nor our information providers shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission thereof to the reader. Opinions expressed are subject to change without notice. Consult your financial professional before making any investment decision. Charts at the top of page one and bottom of page three use the S&P 500 Price Return Index. All other charts showing returns for the S&P 500 use the S&P 500 Total Return Index, which includes returns generated from dividends and dividend reinvestment. The chart at the bottom of page one displays the NASDAQ Composite Price Return Index. Charts displaying returns for gold utilize the Gold London AM Fixing Price Return USD Index. Charts displaying returns for MSCI EM and MSCI EAFE utilize net total return indexes. Net total return indexes reinvest dividends after the deduction of withholding taxes, using (for international indexes) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties. Securities and Investment Advisory Services offered through Summit Equities, Inc. Member FINRA/SIPC, and Financial Planning Services offered through Summit Equities, Inc.’s affiliate Summit Financial Resources, Inc. 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285- 3600, Fax: 973-285-3666.

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