As you will see with your enclosed performance, your portfolio did well during the first half of the year after a significant rise in 2013. While the stock market all-time highs we have recently reached bode well for our bottom lines today, we need to remind ourselves that the stock market does not move in a straight line. It will rise and fall. Should second quarter corporate earnings results falter at all over the coming weeks or should one of the many geopolitical events have an impact beyond their borders and closer to our own, we could see the market falling more than rising over the next few months.
That said, I am very pleased with our year-to-date performance. While I wish I would have had slightly more in intermediate bonds going into this year, I am still comfortable holding 70-75% of your fixed income in short-term bonds. With unemployment dropping to 6.1% after falling 0.8% per year and with the Federal Reserve unemployment target at 5.4%, we may see higher rates sooner than many people think. As the economy heats up, the Federal Reserve will be inclined to increase rates to keep inflation in check. When interest rates climb, bond prices fall. The bonds with the longer maturities and durations will be hit harder than the bonds with the shorter durations; thus, I am satisfied holding the vast majority of our fixed income in short-term bonds.
U.S. stocks are fairly valued right now. Many in the investment community are predicting lower expected returns from U.S. stocks going forward. Whether those lower returns play out with a correction (a drop of 10% or more) or simply lower single-digit returns from U.S. stocks going forward, nobody knows. I am hoping to protect our portfolios by keeping our overseas allocation - which has lagged the U.S. stock market returns - at 23% of our stock allocation or higher as well as continuing to invest in solid, deep-value mutual funds. I am also tilting our stocks toward securities or funds that are focusing on consumer staples.
If we were to experience a sharp downdraft in the market, I believe it would be short-term. If you look at the next ten years, there are not many alternatives out there that I believe will outperform stocks. The bottom line is this: Let's be thankful for the year-to-date returns, but cautious going into the second half of the year.