During the past quarter, the best performing asset classes were U.S. real estate, emerging markets, and inflation protected bonds. The following chart shows the 3-month, 5-year, and 10-year performance of many DFA funds (representing different asset classes) compared to the S&P 500 Index:
Market Returns for the period ending March 31, 2016
|DFA Fund / Index||3 Month Return||5 Year Return*||10 Year Return*|
|S&P 500 Index||1.35||11.58||7.01|
|DFA U.S. Large Value||0.13||10.05||6.04|
|DFA U.S. Small||1.84||9.06||6.62|
|DFA U.S. Small Value||2.13||7.49||4.99|
|DFA Real Estate (REITs)||6.23||11.85||6.27|
|DFA Int’l Large||-1.77||1.66||1.95|
|DFA Int’l Large Value||-4.06||-0.95||0.84|
|DFA International Small||0.38||4.17||4.12|
|DFA Int’l Small Value||-0.81||4.40||3.97|
|DFA Emerging Markets Core||7.26||-3.49||4.32|
|DFA 5-Year Global Bonds||2.32||3.04||3.81|
|DFA Inflation Protected Bonds||5.01||3.24||—-|
*Note: Returns for periods greater than 1 year are annualized. Top 3 returns are in bold.
The stock market reinforced some classic investment lessons during a volatile first quarter:
- The market’s day-to-day movements tell you nothing useful about its future moves.
- It isn’t worth getting worked up about your portfolio during temporary downturns.
- What goes down can also go up.
We think this chart of the Dow Jones Industrial Average vividly illustrates all of the above. The market got off to a bad start from the first trading day of 2016 and worked its way steadily downhill until Feb. 11, when it bottomed almost 10% below where it started. Other market indexes fell even harder—U.S. small stock and some international stock indexes fell by 15% or more. From then on, seemingly out of the blue, good economic news propelled the market up. By the end of the quarter it was up more than 1%.
Were you following stock market headlines daily in January and February? Were you looking at the steady decline in your account balances? If so, you may have felt badly, even scared. This habit is dangerous. The drumbeat of negative news headlines, coupled with the feeling of losing money fast, can lead some investors to make the “big mistake”: selling out to avoid the further losses that seem certain to come. We feel bad for investors who did that in February. Almost as quickly as the decline occurred it was over. Five weeks after the low the declines had turned into gains. Sellers in February locked in losses; patient investors who waited a mere five weeks found themselves made whole.
The market’s up and down cycles rarely occur this quickly or neatly, but they have typically followed this pattern: periodic declines followed by full recoveries and new profits. During a downturn pessimists often tend to think that the trend down will continue and see little hope of an upturn. Each day the market falls seems to confirm this. Fortunately, as we saw again in February, daily declines tell us nothing about the future. It’s just as likely that the trend will reverse and markets will improve.
We suggest ignoring the day-to-day moves in your portfolio. Keep focused on the long-term, secure in the knowledge that a diversified portfolio will rise over time, even though there will be bumps along the way. When the bumps are big enough, we will rebalance your portfolio to take advantage of depressed prices. This process has worked well as some of the worst performers of the last year rebounded to be the best in the first quarter of 2016. Global real estate investment trusts, treasury inflation-protected bonds, and emerging market stocks all had strong returns over the last three months. All three asset classes did better than the U.S. stock market as a whole.
Now, in order to comply with the provisions of the Gramm-Leach-Bliley Act, we are enclosing a copy of SWM’s Privacy Statement for your review. The Privacy Act requires that we deliver this to every client on an annual basis. Also, our updated ADV Part 2 is now available on the Regulatory Compliance page of our website. Since there were no material changes in 2015, we will not be mailing it out, unless you request it.
Thank you for your continued trust and confidence. I had a nice visit to Pennsylvania a few weeks ago, and I’m planning to return again next year in May. Feel free to reach out if you need anything.
Enjoy your spring!
About Christopher Jones
Christopher Jones is the Founder and President of Sparrow Wealth Management, a fee-only financial planning and investment management firm. Before entering the investment field, Chris was a management consultant for Deloitte Monitor. He graduated summa cum laude from Brigham Young University with a B.S. in Economics and a minor in Business Management.