End of Year Portfolio Reallocation Panic

Fund managers are selling precious metals, energy and commodities as we are approaching the end of this year in order to avoid underperforming the SP500 during the next rolling two-year period. Bonds are not yet affected but they may be soon.

Below is a chart of the performance of a 50/30/10/10 portfolio in SPY, TLT, GLD and DBC, without rebalancing, for 2014 YTD and since the start of 2013:


The top indicator pane shows the performance of the diversified portfolio YTD with the weights mentioned on a total return basis, the second pane shows the YTD performance of SPY, the third pane shows the portfolio performance since the start of 2013 and the fourth the performance of SPY in the same period.

Although the performance of the diversified portfolio is only about 0.18% below that of SPY YTD, since the start of 2013 the difference is a whopping 24.5%, the premium paid for diversification. Fund managers cannot sustain another underperformance of the S&P 500 like that in case stocks continue on their uptrends and they are selling precious metals and energy to buy the dips in momentum stocks. Hence, the plunge in gold and silver and the weakness in crude oil, also accelerated by the dollar rally 

In my opinion the reallocators may be late. Often mass reactions come at the wrong time. The wise have already put everything in stocks 3 or 5 years ago and now are bargain hunting in all markets. Actually, this reallocation panic along with the race in stock buybacks is not a good sign for the future direction of the market.

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Disclosure: no relevant positions.
Charting program: Amibroker

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