How Diversified ETF Portfolios can Make You Feel Like a Loser

NEW YORK (ETF Expert) -- Financial professionals often talk about the importance of diversifying across the asset classes. Had you chosen to do so in 2013, however, you may be feeling less giddy than the "Holy Cow, Look at the Dow" cheerleaders on CNBC.

ETFs For 14 Asset Classes         2013 YTD Approx %
               
Large Cap US: SPDR S&P 500 Trust (SPY)       31.9%
Mid Cap US: SPDR MidCap (MDY)       33.1%
Small Cap US: iShares Russell 2000 (IWM)       34.0%
Large Cap Foreign: iShares MSCI EAFE (EFA)     21.7%
Small Cap Foreign: iShares Small Cap EAFE (SCZ)     29.0%
Emerging Markets: Vanguard Emerging (VWO)     -5.5%
Real Estate: Vanguard REITs (VNQ)       3.0%
Commodities: PowerShares DB Commodities (DBC)     -7.6%
Preferred Stock: iShares Preferred (PFF)       -1.1%
Investment Grade US Bond: iShares US Aggegate (AGG)   -2.0%
High Yield US Bond: SPDR Barclay High Yield (JNK)     5.7%
Foreign Bond: SPD Barclays Int'l Corp (IBND)     2.6%
Emerging Market Bond: Market Vectors EM Local (EMLC)   -10.2%
Precious Metals: PowerShares DB Precious Metals (DBP)   -31.1%
               
Equal Weight           7.4%
               

Granted, as Americans we tend to be far more ethnocentric in our investing endeavors; we are exceptionally unlikely to invest as many of our dollars in  foreign stocks as we are domestic stocks. Similarly, few among us tend to place as much faith in commodities or emerging market bonds as we do mainstream stock assets and mainstream bond assets.

We can imagine a portfolio that accounts for a bias toward the United States as well as a lighter emphasis on non-traditional assets. Even here, the sting of perceived "underperformance" may be difficult for some folks to shake.

ETFs Allocation 2013 Approx %   Adjusted    
               
SPY 20%   31.9%   638    
MDY 10%   33.1%   331    
IWM 10%   34%   340    
EFA 10%   21.7%   217    
SCZ 5%   29%   145    
VWO 5%   -5.5%   -27.5    
VNQ 2%   3%   6    
DBC 2%   -7.6%   -15.2    
PFF 2%   -1.1%   -2.2    
AGG 15%   -2%   -30    
JNK 10%   5.7%   57    
IBND 5%   2.6%   13    
EMLC 2%   -10.2%   -20.4    
DBP 2%   -31.1%   -62.2    
          1589.5    
Hypothetical Diversified Portfolio         15.9%
               


In most years, a moderate risk investor might be ecstatic about a total return of 15.9%. Yet, here in 2013, skyrocketing U.S. stocks made diversified portfolios about as appealing as gluten-free, veggie crumble pizza.

In truth, successful investing has never been about throwing the most touchdowns in a single season. It is about making rational decisions to achieve the ultimate goal, whether it is financial freedom in retirement, college education for the kids or an estate that provides for loved ones. (Or, in football terms, it's about winning the Super Bowl.)

If your diversified ETF portfolio made you feel like a loser in 2013, recognize that feelings are fleeting. The answer for improving performance will not rest in chasing U.S. stocks.

On the other hand, you should consider selling some or all of an asset class when the corresponding ETF falls below a long-term moving average. Earlier in the year, exchange-traded vehicles such as Vanguard Emerging Markets (VWO), Vanguard REIT (VNQ), PowerShares DB Commodities (DBC), PowerShares DB Precious Metals (DBP) and Market Vectors Emerging Market Local Bond (EMLC) fell below respective trendlines.

Even if you "feel" like you missed your opportunity to sell, dismiss the feeling and utilize the current price. Is it above or below a critical moving average like the 200-day? Sell some or all of the asset class. You can redeploy cash to the asset class when it reclaims an uptrend

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Certified Financial Planner Gary A. Gordon, MS, is the president of Pacific Park Financial, an SEC-registered investment adviser in California. He has more than 23 years of experience as a personal coach in money matters, including risk assessment, small-business development and portfolio management, and has taught finance in Mexico, Singapore, Hong Kong, Taiwan and the U.S. He wrote the draft copy for "Maverick Investing," a McGraw-Hill publication, and writes commentary for Seeking Alpha in addition to ETF Expert, for which he also hosts the ETF Expert Radio Podcast.