2014 In Review: A Good Year to Avoid Performance Envy

2014 has been an odd year in many ways.  Easy money has continued to be the rule for central governments across the world, and this has created false sense of security that is going on six years (following the end of the financial crisis-induced stock market decline that ended in March, 2009).  To us, it was a year of waiting: for an end to the suppression of interest rates to aid retirees, for the U.S. Congress to do something productive, and for investors to start taking risk more seriously and stop falling for Wall Street come-ons.  Whether its hedge funds, too-good-to-be true situations, private equity paying outrageous valuations for companies or good old consumer leverage from pretending every day is Black Friday, we can’t help but see the signs that investor hubris is back.  It may not be like 1999 or 2007, but it is something that smells funny in its own right.

Below you will see a group of indexes we think tell the story of 2014 for investors.  The headline indexes for stocks and bonds (S&P 500, Barclays Aggregate) have produced strong returns relative to almost everything else.  If you benchmark your returns to a standard 60/40 stock bond blend and used these indexes, you have done quite well.  But here is the key question in evaluating 2014 or any other year: what is information and what is insight?  As you see below, any attempt to diversify away from what has done well since the bottom of the stock market in early 2009 likely left you below that 60/40.  No doubt this will lead the fans of long-term market history to crow loudly that “their way” works.

But investing is nothing if not cyclical, and once something seems easy (like just 60/40-ing your way to retirement success), that is exactly when one needs to turn information (how things have gone recently) to insight (at historically low interest rate levels and an increasingly speculative stock market driven by QE, will prologue equal past?).  In next week’s blog we will look ahead to 2015.  For now, review 2014 to date, along with our short comments below, and think about what your goals are from here forward.

A look back at how a variety of indexes have done this year puts some figures to the picture we painted above (year-to-date returns through 12/12/14):


S&P 500 TR                                          10.48%           Large Nasdaq-listed tech firms drove this

Dow Jones Industrial Average TR           6.69%           More blue-chip, less tech/momentum names

Nasdaq Composite PR                          11.42%           Leaders here are also big S&P components

Russell 2000 TR (small caps)                 0.24%           This “market” was absent in 2014

NYSE Composite PR                               0.96%           Evidence that there were two markets in 2014

EAFE TR (primarily Europe & Japan)     -5.36%           Outside that slice of the US market, it was a rough year

MSCI Emerging Markets PR                   -6.41%           Ditto


Barclays Aggregate US Bond TR           6.06%            The inevitable rise in rates was put off for another year

Long-Term US Govt Bond TR              18.34%            The higher this goes, the greater the eventual decline

Barclays Municipal TR                           9.05%            A sense of overconfidence exists here

BOA ML High Yield Master II TR           0.85%             Signs of cracks in the bond fabric shown here


(combinations of S&P 500 Total Return / Barclays Aggregate Bond)

40%/60%                                             7.40%

60%/40%                                             8.36%

80%/20%                                             9.33%

Combinations of the two “hot” indexes of 2014, representing a Moderately Conservative, Moderate and Moderately Aggressive investor, respectively.  But wait, there’s more…


Conservative                                      3.24%

Moderately Conservative                   3.53%

Moderate                                            3.59%

Moderately Aggressive                       3.15%

Aggressive                                          2.97%

…how is it that these combinations of multiple stock-bond asset classes could have underperformed the S&P 500 / Barcap Bond combinations by so much in 2014?  We think this shows how deceptive the performance “headlines” were in 2014, and we caution investors to think ahead without simply extrapolating the recent past forward.  Our hedged approach to investing focuses on stock selection, hedging against major losses, and does not rely on historically-overpriced high-quality bonds.  We think the market is entering the sweet spot of the cycle for approaches like ours.

© Sungarden Investment Research


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