This week, a few things especially caught our attention. International diversification is starting to reward investors again after a considerable period when a blend of U.S. Stocks and bonds outperformed relative to most other asset allocations. Inflation is starting to accelerate a bit, which contributed to a sell-off one day last week. We also noted another article on why you should be spending your money on experiences instead of things.
The case for International Diversification. In the past six years, U.S. investors have been rewarded for staying close to home. U.S. equities have entered the seventh year of the bull market, one of the longest in history. A traditional 60/40 blend of U.S. stocks and bonds has performed well relative to most other asset allocations. With U.S. equity valuations stretched, however, this may not be the case going forward. Best practices in portfolio construction suggest that owning a portfolio solely focused on the United States may lead to suboptimal risk-adjusted returns. In other words, investors may be taking on risk that could otherwise be diversified away.
It’s early, but inflation may be back. Data released on Friday showed the core US consumer price index rose 0.2 percent month-on-month, up 1.8 percent year-on-year, and has risen 2.3 percent over the past three months. By normal standards, these are modest levels; however, markets have been pricing assets on lower inflation expectations for years. If the core inflation trend persists, the Fed could be forced to raise rates, even when the economy is struggling for meaningful traction. The stock market won’t like higher rates either. Financial Times [tiered registration model].
The Science of Why You Should Spend Your Money on Experiences, Not Things. Most people are in the pursuit of happiness. Money buys happiness, but only up to a point. When studied and measured, major material and experiential purchases are ranked about the same in measured happiness. Over time, however, people’s satisfaction with the things they bought goes down, whereas their satisfaction with experiences they spend money on goes up.
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