Don’t Put Eggs All in One Basket and Other Market Lessons from the Farm

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Returns for a globally diversified strategy over the last 10 years refute the notion of a “lost decade”.

Have you noticed that many of the headlines are about pensions? Last week, the Federal Reserve announced a change to the accounting of pension funded programs for states and municipalities. They use a projected obligation method rather than an accumulated benefit approach and lo and behold the unfunded liabilities ballooned by a whopping $2.3 trillion. In the past few months, the Wall Street Journal (WSJ) has reported that the pension crisis is coming home to roost in state and local budgets. Quite simply, benefits are too generous and lifespans are too long to keep the promises made to state and local workers. Inevitably, benefits will have to be cut or taxes will have to be raised. One WSJ article reported that some big pension funds are lowering their implied rate of return to 7.0%. This makes the already grim situation worse but more realistic. Double digit market returns like the 22% market return last year lull investors into thinking double digit returns are the norm. Investors then run the risk of becoming greedy. However, 6.0%-8.0% is potentially a more reasonable long term equity market rate of return. What’s more , bond returns in a low interest rate world are even lower. Investors trying to time the market will often miss the above average years as they chase returns. Do not count your chickens before they are hatched and stay diversified. Do not put all your eggs in one basket to help build wealth with lower risk.

Please see an example of an effectively diversified portfolio on page 4 of the Global Perspectives Book.

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