WrapManager's Wealth Management Blog

Investopedia defines diversification1 as “a risk management technique that mixes a wide variety of investments within a portfolio,” which “contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.” The goal of diversifying a portfolio is to “smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated." Step 1: Diversifying Your Portfolio Across Asset Classes and Categories A glance at the chart below illustrates how this works. As you can see, different categories of assets may produce higher returns in some periods, but lackluster in others, and the best performing areas change hands regularly over time. (Click the chart for a larger version.) [+] Read More

US stocks have been outperforming international stocks for nearly all of the current bull market. From March 9, 2009 – August 5, 2013, the S&P 500 (SPY) has risen 124.34% compared to just 76.32% for the rest of the world (MSCI All Country World Index ex-United States: CWI). It follows that if you have a globally diversified portfolio, you may have noticed your US stocks outperforming your international holdings recently. Considering that Europe is still in the mire and China is showing signs of slowing, it’s possible this trend could continue. Would it be wise, then, to move some money away from your international equity strategy and rebalance towards a more US-based strategy? Before diving into that question, it’s important to consider how one should approach constructing an appropriate portfolio. Investing isn’t about putting all your money in the best performing asset class so as to generate the highest returns. This would likely result in a very concentrated and risky portfolio diversification strategy. Instead, since investors don’t know which sector, country, or category will outperform moving forward, it’s important to consider having exposure to various sectors and countries as part of a well-diversified portfolio. [+] Read More

WrapManager’s Weekly Summary of Market and Economic News Eurozone Recession Showing Signs of Ending In a sign the eurozone recession may finally be over, Germany posted robust 3.8% growth in factory orders from May this week, far outstripping estimates for 1.1% growth and marking the best growth in 8 months. Italy added good news into the mix as well, in reporting that their GDP fell by only 0.2% in the second quarter, versus a 0.4% expected contraction. They’re inching towards positive GDP growth, as their GDP in the first quarter was -0.6%. Economic activity is picking up.1 The UK Reporting Strong Numbers in Services and Retail The UK is also seeing a nice economic boost. The services sector expanded last month at its fastest pace in more than six and a half years, and retail sales also posted strong gains as total sales grew 3.6% in July, marking the best July growth since 2006.3 [+] Read More

In our recent post on interest rates, we reviewed Federal Reserve policy and explained how future Fed actions may cause interest rates to rise. Some fear that with the Fed gradually taking their “foot off the gas” by reducing the current quantitative easing program, the economy could feel some negative effects. But the question we ask is: Could gradually rising interest rates actually be a good thing for the economy and your portfolio? Here are four reasons it might. Reason 1: Rising Interest Rates as a Vote of Confidence In Wealth Manager Tom Wilson’s recent piece titled “Preparing Your Portfolio for Rising Interest Rates,” he mentions that the Fed’s reductions or elimination of quantitative easing would be a sign of an improving economy. This could reflect itself in rising stock prices, which could be a benefit to portfolios. [+] Read More

Will the Fed continue the quantitative easing program, and who will replace Ben Bernanke? Louis Navellier answers these questions and more. [+] Read More

Cambiar Investors' latest commentary reviews the international and emerging markets, along with the performance of their two international investment strategies. "Despite impressive annualized gains over the past three years, global equities have largely taken a backseat to their fixed income counterparts. Within equities, the U.S. has been the top-performing market, while austerity and slow growth have been headwinds for Europe, and Emerging Markets remain volatile. The Cambiar International Equity and Global Select portfolios continue to seek balance and broad diversification, while maintaining a degree of nimbleness to 'flex' the portfolio if a given sector/region becomes particularly attractive." Download Cambiar Investors' Full Commentary Here Get Free Research Reports on Cambiar Investors [+] Read More

Should you overweight or underweight your portfolio to equities? Nuveen's Chief Equity Strategist Bob Doll answers with his thoughts. [+] Read More

Portfolio Manager Richard Skeppstrom explains why he's continuing to hold his ~60% allocation to equities moving forward. "June jobs, reported July 5, came in stronger than expected at 195,000 and previous months were revised higher. Treasury rates exploded up to 2.725 percent. Markets, both equity and bond, interpreted the numbers as a signal that the economy is indeed stronger and Fed accommodation will ebb." Download Eagle Asset Management's Full Commentary Here Get Free Research Reports on Eagle Asset Management [+] Read More

WrapManager’s Weekly Summary of Top Economic and Market News United States The Bureau of Economic Analysis released initial second quarter GDP numbers Wednesday, coming in at +1.7%. Since real GDP increased +1.1% in the first quarter, this marked an overall acceleration in the growth rate. The uptick primarily reflected gains in nonresidential fixed investment, exports, a smaller decrease in federal government spending, and an upturn in state and local government spending[i]. A day before GDP numbers were released, the Federal Reserve issued a statement labeling US economic activity in the first half of the year as “modest.” They pointed to improving labor market conditions as well as stronger activity within the housing sector, but noted that fiscal policy (reduced government spending) is restraining growth. With inflation still in check and economic conditions as they are, the Fed has indicated they will continue with their current monetary stimulus programs[ii]. President Obama is floating a proposal to cut corporate taxes from 35% down to 28%, while giving manufacturers a preferred rate of 25%. His plan would also include a minimum tax on foreign earnings, as a method of working to avoid corporate tax evasions and curbing international tax havens. The proposed plan is likely to be met by resistance from both parties in Congress, as Democrats are reluctant to lower taxes and Republicans are wary of the new spending proposals that come with the plan. Republicans have also been fairly vocal that any grand deficit reduction deal would need to include structural changes to programs like Medicare and Social Security, which Obama’s proposal does not include[iii]. Europe Last week we reported that European PMI (manufacturing data) came in at 50.1, but those figures were revised higher this week to 50.3. Any reading above 50 signals expansionary activity. PMI rose for every country in the euro zone except for Spain, and the 50.3 reading marks a two year high[iv]. [+] Read More