At Midyear, Where Can Advisors Find Diversification?—Searching for Alpha for July 2013

As we head into the second half of the year, investor perception of the current state of the economy is changing. One of the biggest changes in perception is the role of gold in a diversified portfolio. 

After enjoying a spectacular decade of returns, gold took a breather in the second quarter. Recent data indicates that the inflation rate remains stubbornly low.That, coupled with the higher yields one can garner from the rise in interest rates over the last six weeks, has made the yellow metal seem more like a millstone than a core holding. The 30% drop in GLD from its peak this year is an indication that investors are seeking alternatives to precious metals. The same thing seems to be occurring in other hard assets as well. 

Bonds are getting more scrutiny as well. With so few places left to hide in the asset class, how will advisors be able to add diversification? Although fixed income still deserves a place in portfolios, allocation percentages need to be changed to reflect the realities of the current rising rate environment.