Quarterly Market Update: Diversification Bites

I’ve provided you with performance of various asset classes around the world for both the third quarter and year-to-date to give you a sense of how global markets are performing. I’ve sorted the list by Year-To-Date returns going from lowest to highest.

What do you notice?

 

Well, for one, you should notice emerging market stocks (the best performer last year) have been crushed so far in 2018.

More importantly, you should notice everything is down so far this year except U.S. stocks and REITs.

For 2018 thus far, you’ve done really well if your portfolio has been highly-concentrated in the U.S. stock market. You’ve done relatively poorly if you have a diversified portfolio. The great irony of this is that the U.S. stock market is the most overvalued market of all those listed above AND the U.S. stock market is more overvalued than it’s ever been in history including both the 1929 Roaring Twenties and 2000 Dot-Com Bubble peaks!

See chart below from Dr. Hussman showing the most reliable valuation metrics at 3x historical averages.

 

And this chart showing one of the metrics from the chart above, but goes all the way back to before the Great Depression.

 

These conditions of extreme overvaluation also imply the downside potential in U.S. stocks is tremendous. Therefore, it’s possible two decades of price appreciation could be wiped out in the next bear market. In other words, to bring the U.S. stock market valuations back to historical norms / fair value, U.S. stocks would need to lose about two-thirds their value, or ~66%! (Hussman October 2018) That would bring the S&P 500 from about 2,900 to under 1,000, a level first seen around 1997/1998.

So stay the course. Remain disciplined and committed to your diversified strategy as long as the strategy was developed as the consequence of robust, stress-tested financial projections and tailored to your unique circumstances!

If, on the other hand, you’re concerned you might have too much exposure to some of the most overvalued assets in history but don’t know what else to do then let me know so I can help. You do not want to jeopardize your financial independence. You’ve worked too hard and you only get one shot. No do-overs.

Past performance is no guarantee of future results.

Data herein from third-party sources believed to be reliable but accuracy cannot be guaranteed. Commentary intended as general education NOT individualized investment advice.