2013 was an extraordinary year for U.S. and developed marked stock indices in general. However, the Covestor Lower Volatility Returns portfolio underperformed the S&P 500 Index (SPX) for the year.

That is expected mathematically because the S&P 500 was one of the best performing asset classes in the world last year and, by definition, a diversified portfolio like mine  includes other asset classes.

The contrarian in me is looking for underperforming, less correlated (to the S&P 500 Index) investments. Some examples of asset classes on my radar screen are emerging markets, emerging markets debt, precious metals, and related mining companies.

Reviewing the Lower Volatility Returns’ existing positions, many assets continue to look attractive in my opinion. Northern Europe (including Belgium and the Netherlands) still looks appealing as Europe continues its slow recovery.

Real estate investment trusts (REITs) have underperformed, likely due to concerns over rising interest rates. However, in my opinion this asset class continues to play a valuable role as a portfolio diversifier.

In my opinion, South Korea and South Africa are good long term performers that provide additional diversification.

In addition, energy services is a specialty asset class that remains a good hedge against energy price spikes that tend to hurt traditional equity performance.

While interest rates are low and the mainstream press seems to be convinced that a significant interest rate increase is around the corner, a small position in long term government debt, in my opinion, remains as a hedge against “black swan” event type risk.

When bad things happen, investors usually run to such US debt and they have been (using my longer time frame) inversely correlated with the US equity markets while corporate debt has not been. Consequently, if interest rates rise further, I plan to increase my position in longer- term US government ETFs.

DISCLAIMER: The investments discussed are held in client accounts as of December 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.