Following the recent steep drop in foreign markets, today the U.S. stock market opened way down - in early trading we saw a 4% fall. Since the market peak in October 2007, stocks have been weak around the world. While the market has come back in the afternoon, we just about saw the most indexed and benchmarked of U.S. stock indexes down 20% from the highs hit just over three months ago.
A 20% drop is a measure often used to denote a bear market. We haven't had a 20% fall since the great bubble pop of 2000-2002. Unlike the last bear market, this one is proving hard to dodge.
In the late 1990s we didn't have across-the-board asset price booms. Real estate was relatively cheap, as was natural resources and commodities, small cap stocks, and value stocks in general.
Back in 1999 the entire Russian stock market had a combined market cap less than any individual major stock in the Nasdaq or S&P 500. Even safe U.S. Government bonds had a decent yield. The bubble was in tech, telecom, U.S. large cap and growth stocks. Anyone who was "properly" diversified across multiple asset classes at least partially avoided the market meltdown that eventually took the S&P 500 down almost 50% and the Nasdaq almost 80%.
Over much of the last few years investors have been piling into foreign stock funds. Today the iShares MSCI EAFE Index (EFA) exchange traded fund or ETF tips the scales at around $50 billion - second only to the oldest ETF, the SPDR S&P 500 ETF (SPY) exchange traded fund with $85 billion. Heck iShares MSCI Emerging Markets Index (EEM) has $24 billion - more than the $19 billion in the Nasdaq 100 ETF or QQQ (the ticker is now QQQQ).
Unfortunately in this down market all this diversification is hurting, not helping. The Dow and S&P 500 are among the relatively best performing areas to invest - many foreign markets have fallen over 10% in the last two days alone. Most of the big foreign stock markets are already down more than the U.S. market during this downturn. Real Estate Investment Trusts or REITs - a favorite to the diversification crowd - are now down near 40% from the peak in February 2007.
Bottom line, diversification helps when investors are adding cheap out-of-favor asset classes. Adding expensive asset classes - even ones that have been historically less correlated to U.S. stocks - can increase portfolio downside in a bear market. Going forward, we expect U.S. stocks to continue to outperform essentially all the hot categories of recent years. Our fund category rating system rewards categories that have underperformed and seen a lack of interest by investors in recent years.
Following the recent steep drop in foreign markets, today the U.S. stock market opened way down - in early trading we saw a 4% fall. Since the market peak in October 2007, stocks have been weak around the world. While the market has come back in the afternoon, we just about saw the most indexed and benchmarked of U.S. stock indexes down 20% from the highs hit just over three months ago.
A 20% drop is a measure often used to denote a bear market. We haven't had a 20% fall since the great bubble pop of 2000-2002. Unlike the last bear market, this one is proving hard to dodge.
In the late 1990s we didn't have across-the-board asset price booms. Real estate was relatively cheap, as was natural resources and commodities, small cap stocks, and value stocks in general.
Back in 1999 the entire Russian stock market had a combined market cap less than any individual major stock in the Nasdaq or S&P 500. Even safe U.S. Government bonds had a decent yield. The bubble was in tech, telecom, U.S. large cap and growth stocks. Anyone who was "properly" diversified across multiple asset classes at least partially avoided the market meltdown that eventually took the S&P 500 down almost 50% and the Nasdaq almost 80%.
Over much of the last few years investors have been piling into foreign stock funds. Today the iShares MSCI EAFE Index (EFA) exchange traded fund or ETF tips the scales at around $50 billion - second only to the oldest ETF, the SPDR S&P 500 ETF (SPY) exchange traded fund with $85 billion. Heck iShares MSCI Emerging Markets Index (EEM) has $24 billion - more than the $19 billion in the Nasdaq 100 ETF or QQQ (the ticker is now QQQQ).
Unfortunately in this down market all this diversification is hurting, not helping. The Dow and S&P 500 are among the relatively best performing areas to invest - many foreign markets have fallen over 10% in the last two days alone. Most of the big foreign stock markets are already down more than the U.S. market during this downturn. Real Estate Investment Trusts or REITs - a favorite to the diversification crowd - are now down near 40% from the peak in February 2007.
Bottom line, diversification helps when investors are adding cheap out-of-favor asset classes. Adding expensive asset classes - even ones that have been historically less correlated to U.S. stocks - can increase portfolio downside in a bear market. Going forward, we expect U.S. stocks to continue to outperform essentially all the hot categories of recent years. Our fund category rating system rewards categories that have underperformed and seen a lack of interest by investors in recent years.