Investor column: Did your portfolio pass the test?

July 9, 2013 

Recently, the U.S. and European Union subjected banks to stress tests to determine whether they will survive economic and market upsets.

Whether you like it or not, the markets recently tested your investment portfolio. How you, and your portfolio reacted, can help you decide if you are invested properly.

Over the last several months, there has been increased speculation about the future of interest rates, unemployment and economic growth. In mid-June, some investors read the Federal Reserve tea leaves and concluded that interest rates would be pushed up.

Bond and equity markets reacted by losing value over several days and then, some asset classes gained most of their value back. Let's take a look at what happened and what it means to you.

When interest rates increase, or are expected to

increase, the value of existing bonds goes down.

Bonds with longer maturity and lower coupon rates will react more negatively.

The value of U.S. Treasury, corporate, international and junk bonds will move in the same direction but may move with varying magnitude and rates of change.

For example, during the third week of June, intermediate term bond prices (Barclays Aggregate Bond index -- AGG) dropped 2.3 percent. They then rose .97 percent over the next three days, for a loss over two weeks of 1.4 percent. Long-term U.S. Treasury bonds (iShares 10 -- 20 Year Treasury index -- TLH) dropped 4.2 percent and rose 1.2 percent, a two-week loss of 3 percent. If you look at the bonds or bond funds you own, you can see how much value was lost and recovered, even when actual rates did not change!

As interest rates will increase at some time, you can decide if this was acceptable and how you will feel when a larger change occurs.

Likewise you can see how your stocks and other equity investments responded. Over the same two-week period, large U.S. company stock prices (S&P 500 -- SPY) started with a slight increase, a drop and then an increase for a total loss of 1.3 percent.

Smaller U.S. companies (Russell 2000 -- IWM) had similar pattern with a total loss of .15 percent. Emerging market companies (MSCI

EM -- EEM) had a total loss of 2.6 percent. Master Limited Partnerships/Pipeline companies (Alerian MLP -- AMLP) actually had an increase of 1.5 percent, although the ride had steeper drops and climbs.

The next market test may not be caused by the same events and your investments may react differently. You should not evaluate investments over a two-week period, but if you were uncomfortable with the results you might want to look at your investments.

I suggest looking at your investment goals and how much risk you are comfortable taking. Consider other potential risks such as inflation, government and liquidity. Look long and short term, and then decide if you are satisfied with your investments.

Investment reviews should be done periodically, but there is nothing like a crisis to jolt us in to taking action. Do it now and avoid surprises when the market tests again.

Tom Roberts, a certified financial planner and owner of A New Approach, Financial Planning in Lakewood Ranch and Sarasota, can be reached at (941) 927-9590.

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