During the first quarter of 2017, the best performing asset classes were emerging markets, international small, and international small value stocks. 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, 2017
|DFA Fund / Index||3 Month Return||5 Year Return*||10 Year Return*|
|S&P 500 Index||6.07||13.30||7.51|
|DFA U.S. Large Value||3.53||14.65||6.71|
|DFA U.S. Small||0.99||13.49||8.33|
|DFA U.S. Small Value||-1.35||13.03||6.36|
|DFA Real Estate (REITs)||0.79||9.75||4.53|
|DFA Int’l Large||7.45||5.49||1.37|
|DFA Int’l Large Value||5.93||5.23||0.37|
|DFA International Small||8.40||8.54||3.48|
|DFA Int’l Small Value||7.73||9.78||3.37|
|DFA Emerging Markets Core||13.68||1.89||3.93|
|DFA 5-Year Global Bonds||0.76||1.94||3.30|
|DFA Inflation Protected Bonds||1.50||0.94||4.44|
*Note: Returns for periods greater than 1 year are annualized. Top 3 returns are in bold.
Investment markets continued their post-election rise during the first quarter, although overseas stock markets took off and outpaced American stocks and bonds by a good margin. The Standard & Poor’s 500 Stocks Index was up about 6 percent in the first three months of the year, as reported by The Wall Street Journal on its “Markets Digest” page. The index is up about 10 percent since the presidential election last November, according to the same source. International stocks—especially those in Asia and in emerging markets—were up twice as much or more so far this year as the world’s economy strengthened and the dollar fell in value, making stocks denominated in foreign currencies more valuable. Since we always invest a portion of your portfolio in international and emerging markets stocks, you benefitted from that rally.
The economy looks good enough that the Federal Reserve felt comfortable raising short-term interest rates by another quarter percentage point in March, bringing short rates to 0.75 percent. The Fed continues to predict that it will get to 3 percent within the next three years and does not believe its rate increases will cause another recession. Unfortunately, the Fed is not infallible and it is impossible to tell where the economy will be in three years. At this point, however, interest rate expectations and monthly economic statistics continue to indicate growth ahead.
That does not mean the stock market must continue going up. It has not had a real pullback since the short-term panic last summer over Great Britain’s vote to leave the European Union. On average the market has at least one 10 percent decline—known as a “correction”—per year. Since the current bull market began eight years ago, it has corrected only four times, The Wall Street Journal reported on Mar. 27. This does not mean we are overdue for another correction. They do not follow a timetable; they are unpredictable, and, better yet, usually over quickly. We just want to warn you that a quick decline of 10 to 15 percent is possible at any time, and that you shouldn’t let it trouble you. The best course is to ignore it and stay invested. We will watch your portfolio for tax selling and rebalancing opportunities. Your job is to stick to your long-term financial plan.
We are happy to note that the type of investing we do—buying and holding large diversified pools of investments without trying to pick or choose among investments or to time the markets—is becoming “respectable.” By that we mean that criticism of indexing and passive asset class investing by those who claim to have stock-picking or timing “expertise” has waned while more professionals are moving to indexing. For instance, it was reported last week that BlackRock, the world’s largest mutual fund company, is getting rid of its stock-picking portfolio managers and replacing them with passive investment strategies. As financial writer Fred Schwed Jr. noted in his hilarious 1940 classic, “Where Are the Customer’s Yachts? Or, a Good Hard Look at Wall Street,” it’s easy to hire a plumber to fix a sink or a surgeon to remove a gallbladder, so why is it so hard to hire an investment professional to help outwit the markets? Because “the subject of choosing profitable financial investments does not lend itself to competence,” he wrote. “There is almost no visible supply.” We have followed that advice for many years and have been happy with the results.
Now, in order to comply with the provisions of the Gramm-Leach-Bliley Act, we are including 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 (www.SparrowWealth.com). Since there were several material changes in this update, we have included a copy of our ADV Part 2 with our quarterly email.
Thank you for your continued trust and confidence. Feel free to reach out if you need anything.
Enjoy the spring weather!
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.