Second Verse, Same as the First

If you have a little less hair now than you’ve had in the past, or if the hair you do have is some variation of the color of silver, you might recognize the title of this post. It’s a line from the Herman’s Hermits’ 1965 hit version of the song “I’m Henry the Eighth, I Am.” The song was originally popular as a 1910 British music hall tune, and it became the second-fastest-selling song in history (up to that point) when the Hermits released their version. It was the British band’s second No. 1 hit on the Billboard 100. It was also a pretty simple song. In the Hermits’ version, it was the same chorus sung three times. Between the first and second chorus, Herman (Peter Noone) called out, “Second verse, same as the first.” It became an iconic phrase.

What does a line from a mid-1960s pop song have to do with either financial planning or investing? Well, quite frankly, not a lot. But it is what went through my head as I spent some time this weekend reviewing the most recent performance of the markets. I guess I’m really showing my age!

I’m writing this article during the Fourth of July holiday weekend, and that means we just ended the second quarter of the year. The end of a quarter is a good time to check the score and see how the asset classes that we use to build our clients’ portfolios are performing. It’s the first step in deciding whether, and how, we will need to rebalance those portfolios.

The first quarter of the year, ending in March, was a very good one for investors. All the asset classes that we use in our portfolios were higher. Stocks led the way. Emerging market stocks were the big gainers in the quarter, followed by international developed country stocks and, finally, U.S. stocks. All three of those asset classes enjoyed big gains. Real estate enjoyed modest gains, and even bonds were higher for the quarter, although not by much.

Second verse, same as the first. Or, I should say, second quarter, nearly the same as the first. The gains weren’t quite as big in the second quarter, but stocks led the way again. The international developed country stocks swapped the top spot with emerging markets, but both were nicely higher. U.S. stocks once again showed nice gains, but trailed their international counterparts. Real estate gained slightly again, and bonds managed to eke out some more small gains, except for the Treasury Inflation-Protected bonds, which finished fractionally lower for the quarter.

So, what does this mean to you? It means that unless you are rebalancing your portfolio regularly, you might have more exposure than you think to stocks, particularly international stocks. If that’s the case, then you are taking on more risk than you normally would. It might be time to bring your portfolio back into balance by selling off some of the stocks that have enjoyed big gains this year and using the proceeds to bring your bond allocation back up to where it’s supposed to be.

Remember, rebalancing doesn’t mean you are selling the entire asset class. It simply means that you sell enough to capture the gains that you’ve benefited from over the last two quarters. Buying low, selling high—that’s the way we are supposed to play this game of investing.