A Month of Seeing Red

Blood was definitely running in the streets last month.

As our table below reminds, red is now the dominant color in performance tallies. But black hasn't been completely banished. For those who owned commodities, inflation-indexed Treasuries or cash, June wasn't a complete loss.

Commodities, of course, were the big winner last month. The Dow Jones-AIG Commodity Index surged more than 9% in June and is now up 27% so far this year, based on the exchange traded note proxy cited in our numbers above. Clearly, if you didn't have commodities exposure in your portfolio, your portfolio suffered.

Although it's tempting to chase the hot performance in commodities, strategic-minded investors should be wary at this point. The DJ-AIG Commodity index, like all commodities benchmarks, has been rallying for years. The last calendar year loss for DJ-AIG Commodity was 2001. If the index manages a gain by the end of 2008, that will mark the seventh straight year of calendar year gains.

No, we're not willing to say when the commodities boom will end. For all we know, it'll go on for another seven years. Then again, it could end tomorrow. As a general rule, however, the longer any asset class rallies, the more cautious we become on estimating expected returns. At the same time, the longer asset classes endure selling, the more optimistic we become.

That said, we never doubt the value of diversification across all the major asset classes. On that note, we're adding a new monthly update to our usual scorecard of asset class returns, the Capital Spectator Global Market Index. This benchmark, compiled and updated by your editor, owns all the major asset classes in their respective market-based weights. We'll be writing more about the CS Global Market Index in future posts; meantime, here's a brief overview, as per our recent post.

Returning to the issue of June's performance, it's clear that the CS Global Market Portfolio Index was only slightly bruised in last month's selling. Posting a relatively mild loss of 1.8%, our global market index has held up quite well. It's encouraging to see that for the past year it's up 3.7%.

In fact, the value of owning everything in its market-based weight is that over the long term the mix has proven itself a worthy competitor to those who attempt to outguess Mr. Market. Or so history tells us. No guarantees for the future, of course, although there are fundamental reasons for thinking that more of the same is available for patient investors. One reason is that a market-weighted portfolio of everything requires no rebalancing. That, in turn, keeps trading costs, and associated taxes at zero, excepting, of course, for any distributions from the various funds. Meanwhile, building a real-world portfolio based on all the major asset classes via ETFs, ETNs and index mutual funds carries a low fee in terms of dollar-weighted expense ratios--something on the order of 50 basis points.

To be sure, owning everything isn't a short-cut to easy riches. Nor can any one say for sure that it'll always and forever beat the majority of actively managed portfolios. As we learned last month, even a global market portfolio can lose money at times. But to the extent that diversification is a good thing, the world's equities, bonds, REITs and commodities are available for a relative song. For most investors with a long-term perspective, partaking of the full offering of the world's markets is a compelling strategy.

Comments

[Ashish S]

What are the approximate weights you are using? How would you weigh assets like "cash"?

[David White]

Where do you think the market is going now? It has taken a hard hit today, even in the face of relatively good economic news (ISM and Construction Spending were better than expected). Also I read an article recently that said the housing market in Central Florida was stabilizing. I think the same can be said for California to some degree. Governor Swartzenegger went on record recently as predicting the California real estate market will turn upward in California in 2009. I know there are still some write down problems, but even Greenspan is saying that we are at least 2/3 through it. Do you think the stock market will turn upward now? Or will the S&P500 go right through its resistance level of 1250? To me it looks like it might hold (at least temporarily). I know there has been the flooding in the midwest. However, the grain futures have been down the last 2 days due to a report asserting that more acreage was planted this year (for corn). This means that even with the flooding, the food supply should not be much lower (if at all) than previous years. This should be good news for the markets. It make be temporarily bad news for Agriculture stocks. However, even the author writing about this seemed to think the report was too optimistic about the acreage that would be productive this year (after the flooding). To me this means that the Ag stocks can bounce back, and the inflation situation due to Ag is not too bad. I think this should allow the markets to move higher. What do you think?

[Black Swan]

I think your GS Market Portfolio index makes all the sense in the world so to speak. You are adopting David Swensen type approach which has been super successful for Yale Endowment Fund for last 20 years with 16% + annual return average. By the way Vanguards new Managed Payout Funds use a somewhat similar approach and provide a very easy way to invest following Swenson/GS Market type models and theory. See for example VPGFX.