Red Ink Spreads Across All The Major Asset Classes For 1-Yr Returns

by: James Picerno

Last week's selling wave pushed most of the major asset classes into the red for the five trading days through Jan. 15, based on a set of proxy ETFs. For the one-year trailing period, everything has lost ground. Negative momentum, in other words, is in high gear.

Swimming against last week's red-ink tide: US investment-grade bonds. The Vanguard Total Bond Market ETF (NYSEARCA:BND) inched higher for the five days through Jan. 15, gaining 0.1% on a total return basis. Otherwise, losses in varying degrees prevailed across the board.

Meanwhile, all the major asset classes have slipped below zero in the total-return column for the trailing one-year period (252 trading days) through Jan. 15. Even the US investment-grade bond space via BND is suffering with a slight loss for this trailing window. The last time BND's one-year total return was under water: the spring of 2014.

The sight of losses in all the major asset classes for the one-year period is a reminder that asset allocation alone has limits as a risk-management tool at times. It's a crucial part of portfolio design, but like everything else it's not perfect. That's not the same as saying that asset allocation has failed - far from it. But expecting that asset allocation in isolation will provide all your risk-management solutions at all times is expecting too much.

The one exception to that caveat: investors (and institutions) with truly long time horizons and the discipline to look past the periodic volatility spikes in the short term. But that's an elite club with just a handful of card-carrying members. For everyone else, recent events serve as a wake-up call-again-that asset allocation works best when used as part of a multi-faceted risk-management toolkit.