January 2009 - Economic Outlook

Portfolio diversification continued to offer little to no benefits as short-term minded investors abandoned assets with any hint of risk in preference for cash and treasury securities. This panicked demand for treasury securities, at times, pushed some treasury yields negative as investors simply wanted assurance that principal would be left intact. It also resulted in Barclay’s Capital Intermediate Term Treasury Index returning 11.35% in 2008. This has left some to argue of a potential bubble developing in what some investors perceive as a “riskless” treasury asset class. Additionally, the year 2007 ended with approximately $3.107 trillion in money market fund investments. That amount grew by $723 billion throughout 2008 to reach a total of $3.830 trillion invested in money market funds as of December 31, 2008. With the massive flow into money market funds/treasury securities and the fact that these investments are now yielding 1% to 2%, the prospects of an eventual rotation into more risky assets seems likely. This will ultimately benefit our patient long-term diversified approach once a rotation gets underway.