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By Seth J. Masters

Many US investors may be disappointed when they open their account statements. Despite the widespread news that the Dow Jones Industrial Average gained 21% in the first 10 months of 2013, most US investors’ taxable portfolio returns were far lower -- typically somewhere between 5% and 16% range.

Why? With interest-rates rising, bond markets have returned little, if anything this year. As a result, no balanced account could come close to matching the results of US stocks (Display).

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Making matters worse, many investors have at least some allocation to non-US stocks. While total returns (including dividends) for the developed international stock markets have also been strong this year (although below total returns for US stocks), emerging-market returns were just 0.3%.

Such a wide dispersion in asset-class returns is highly unusual, and has made asset allocation, which is always important, the primary driver of portfolio results in 2013.

Growth-oriented investors, with heavy allocations to stocks, have been the decided winners this year. Preservation-oriented portfolios, with heavy allocations to bonds, have lagged far behind.

This isn’t to say that investors with preservation-oriented portfolios were “wrong.” If capital preservation is your goal - perhaps because you’re saving to buy a house or pay for your kids’ college tuition fairly soon - your portfolio achieved its goal this year.

Furthermore, nearly 6% in 10 months is a lot better than we would expect of bond-heavy portfolios these days. The 15% return for a well-diversified growth portfolio or the 11% for a moderate portfolio is also a lot better than we would typically expect. The reality is that balanced portfolio returns were very strong this year. Unfortunately, many investors expect even more.

Also, many investors have kept their portfolios skewed to bonds and cash over the past five years because they were traumatized by the market swoon in 2008, and prized safety at any price - even if they needed growth to fund their retirement or other goals.

In our view, such a portfolio may be quite risky - if risk is defined not simply by the chance of a big short-term loss, but also by the likelihood that portfolio returns won’t be large enough to fund spending needs.

We don’t expect the stock market to continue rising at its recent, fevered pace - but we do think it’s fairly valued relative to earnings and the bond-market alternative. For those who need portfolio growth, it isn’t too late to get back into stocks.

Disclaimer: The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Seth J. Masters is Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein.

Source: Reality - Expectations = Happiness