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Anchoring Aweigh

Human nature tends to extrapolate recent events into the future. In investing, this is called the anchoring bias, as investors tend to think that what has gone up recently will continue to do so and that laggards will continue down. Rigorous diversification is a method to combat this inclination. The only problem is that in the last few years, large U.S. stocks have continued to go up, while other categories have been flat or struggled.

2015 is shaping up differently so far. Investors diligently holding a wide array of stocks, with a substantial set of overseas stocks are benefitting. Most European and Asian stocks have paced ahead of U.S. stocks. In 2014, even though international stocks were relatively cheap based on their price to earnings ratios, investors overwhelmingly preferred U.S. stocks. Not so in 2015, with additional European Central Bank measures and the boost from lower oil prices increasing the prospects for international businesses.

Investors with large holdings in bonds may have also felt some difficulty from the anchoring bias, with the S&P 500 outpacing their holdings. It is only natural to wonder if the trend will continue, and if the traditional uses of bonds for income, diversification and downside protection are worthwhile. But so far in 2015, most categories of bonds have also outpaced U.S. stocks.

While U.S. stocks remain an important part of portfolios, year to date performance and diversification remind us that broadly invested portfolios make sense over the long term. Our innate hunches can only lead us so far.

2.11.15

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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