NHL playoff teams know the importance of protecting a lead; investors should consider a similar strategy with this year’s stock market gains.
Resilient portfolios avoid concentration in one asset class, or any single source of risk.
The strong differential performance between stocks and bonds this year presents a timely opportunity to rebalance one’s allocation between the two.
The National Hockey League playoffs are marvelous to watch. The league’s best teams play their best hockey with every game more meaningful than those played during the regular season. Playoff games feel much more strategic, and one key aspect of playoff strategy is the importance of playing with the lead. In fact, of the 53 playoff games this season that went to the third period with one team ahead, 43 of those, or 81%, finished in favor of the team that was winning after two periods.* NHL playoff teams know how to protect a lead once they have it.
Investors in 2013 could take a cue from these athletes. The first five months of the year have been very kind to investors, with many of the world’s stock markets delivering double-digit percentage gains. For those positioned accordingly, year to date portfolio returns may well have already exceeded their full year expectations. It is the investment equivalent of playing with the lead.
However, some troubling developments late in May gave a reminder of how quickly a lead can slip away in financial markets. The world’s leading major equity market this year, Japan, finished the month with three out of the last seven trading days delivering losses of more than 3%, the worst of which was a 7% setback. U.S stock markets limped to the finish as well in May. The S&P 500, for example, shed 2.3% from May 21 to the end of the month. Whether recent volatility is suggestive of a reversal of fortune is impossible to tell, but we think investors should review their strategy for protecting their lead just in case.
The first line of defense, of course, is diversification. Resilient portfolios avoid concentration in one asset class, or any single source of risk. Investors who have ridden the equity market wave this year should assess their stock market concentration risk. For portfolios whose exposure to stock market risk dominates, adding some bonds could make sense. With yields having risen substantially during May, the entry point for interest rate sensitive bonds is now reasonable. Non-U.S. bonds are especially attractive as portfolio stabilizers today, as currency turbulence — that is, a weaker dollar — could be part of the landscape if year to date trends reverse. For investors reluctant to add interest rate risk, a multi-sector bond fund or an absolute return fund might be appropriate. Equity market hedges remain affordable as well, for those interested in truncating downside risk. If nothing else, the strong differential performance between stocks and bonds this year presents a timely opportunity to rebalance one’s allocation between the two. Whatever the method, we think that time spent formulating a strategy for protecting the lead in 2013 will be time well spent.
Oh, and Go Bruins!
*Sources: ESPN.com and Columbia Management Investment Advisers, LLC.