As we had anticipated, 2016 has been an interesting year for the markets. Volatility returned in January as the major indexes declined over 10%. Staying invested in a diversified portfolio paid off as the major indexes regained nearly all of those losses over the last month.
Although we have recently seen a reduction in market volatility, there are still some looming uncertainties which we feel warrant maintaining a conservative outlook for the remainder of 2016. These include; oil price instability, negative foreign interest rates, mixed corporate earnings, and the presidential election in November.
U.S. Economic data continues to slowly improve. The Fed recently reduced their forecast to two interest rate increases before the end of the year. This slow and steady approach to increasing rates is expected to cause minimal disruption to the equity and bond markets; however there is always the potential for surprises.
To add further diversification to the bond portion of our portfolios, we are re-introducing long term bonds in the form of a Long Term US Treasury fund, Fidelity Spartan Long Term Treasury Bond Index (FLBIX). Long Term Treasuries tend to be negatively correlated with stocks. This is because when there is concern over the risks in stocks, investors move to safer investments like US Treasuries. This should provide additional diversification and yield. To make room for this fund, we reduced the short duration exposure in our models.
In the US equity space, we are continuing to slightly overweight growth funds to take advantage of the current valuation discount compared to value style funds.
As always, we continue to review changes in the market closely. We evaluate the performance of our fund selections on a daily basis. We also pay close attention to all of our funds, in order to stay abreast of any changes made to their management team and/or management style.
Diversification through an asset allocation strategy is a useful technique that can reduce overall portfolio risk and volatility. Diversification does not eliminate risk, does not guarantee a profitable investment return, and does not protect against loss. Past performance is no guarantee of future results.