Isaacson Update & Special Reports

Risk On, Risk Off - January 24, 2012

Following on the heels of a dismal third quarter, equity markets rallied to finish the year on a positive note.  For the quarter, the S&P 500 returned 11.8% (+2.2% for the year), the Russell 2000 small company index returned 15.5% (-4.4% for the year) and the MSCI EAFE international index returned 3.3% (-12.1% for the year). Bond markets had a very strong year, with municipals returning over 6% and taxable bonds in the 5%–8% range depending on credit quality.

Most clients’ balanced portfolios finished the year essentially where they started, although significant volatility along the way made the year feel anything but flat.  The S&P 500 was as high as +10% during the Spring and as low as -10% in early Fall.  While “risk off” asset classes such as Treasuries, municipal bonds and gold all materially outperformed their historic averages, “risk on” asset classes such as small cap, international and emerging markets stocks were hit particularly hard.  What is important to keep in mind is that while these “risk on” asset classes have consistently been the most volatile segments of a diversified portfolio, they have also historically been the best performing segments of the market over longer stretches of time.  Investors can be rewarded with the inclusion of these asset classes in their portfolios if they can stomach the short term volatility and resist the urge to sell during periods of sharp underperformance.  If you have any questions about specific fund managers or your portfolio in general, please do not hesitate to contact us.

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