The start of a new year is often a time to visit with clients and review their financial plans, assess the portfolio and engage in some sort of conversation about what to expect from markets over a period of time relevant to the client.
The last few years have obviously been a very good run for domestic large-cap equity markets, and it is likely that clients will quickly recognize just how much that asset class has outperformed small-cap, foreign equity, emerging markets and even commodities and alternatives for advisors who allocate that type of diversification for their clients.
Maintaining a diversified asset allocation and decisions about rebalancing is arguably an active process. ETFs nevertheless present the most modern tools to gain exposure to asset classes and specific strategies. Regardless of whether index or active strategies are used, advisors can use different combinations of ETFs to help clients focus on a portfolio and its goals, and not on a specific position.
For example, while foreign equities have lagged far behind domestic equities for the last few years, the former dramatically outperformed during the 2000s. Between the two, one must outperform and one must lag, and if an advisor owns both, it is because he or she does not believe in guessing with their clients’ money. One area will deliver better results and of course this diversification offers the benefit of reducing portfolio volatility. The same applies for a diversified portfolio that uses five asset classes—one must be the best performer and another the worst. Of course, nobody can know ahead of time which area will be best, which is the reason for diversification—a message that cannot be repeated enough.