During the first quarter of 2020, the best performing asset classes were short term bonds and inflation-protected bonds. The following chart shows the 3-month, 10-year, and 20-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, 2020
|DFA Fund / Index||3 Month Return||10 Year Return*||20 Year Return*|
|S&P 500 Index||-19.60||10.53||4.79|
|DFA U.S. Large Value||-31.52||7.55||6.64|
|DFA U.S. Small||-32.73||6.73||6.15|
|DFA U.S. Small Value||-39.02||4.16||6.77|
|DFA Real Estate (REITs)||-23.06||8.44||9.84|
|DFA Int’l Large||-24.43||2.38||2.02|
|DFA Int’l Large Value||-31.98||0.00||3.66|
|DFA International Small||-30.21||3.72||6.24|
|DFA Int’l Small Value||-33.70||2.35||6.99|
|DFA Emerging Markets Core||-27.13||0.36||5.21|
|DFA 5-Year Global Bonds||0.19||2.62||3.71|
|DFA Inflation Protected Bonds||1.66||3.61||N/A|
*Note: Returns for periods greater than 1 year are annualized. Top 3 returns are in bold.
The first quarter of 2020 has been dominated by news of COVID-19 and its spread across the world. In an effort to contain the spread, governments have closed down their economies and encouraged people to stay home. Unsurprisingly, this has caused a swift decline in the global stock market; in fact, it has caused the fastest bear market ever recorded.
Central banks fought back by cutting interest rates and providing liquidity to the financial markets in attempt to maintain order. The Federal Reserve slashed interest rates by .50%, then cut rates by another 1% just two weeks later. They created several programs to support the bond markets, including unlimited quantitative easing, better known as buying longer term bonds to drive down interest rates. Meanwhile, Congress passed a $2 trillion stimulus package to provide support to individuals and businesses to help people get through the economic hurricane.
Despite those efforts, the global stock market lost approximately 22% during the first quarter.* Small stocks, value stocks, international, and emerging market stocks all fared worse. The S&P 500 performed better than other equity assets classes due to its exposure to large growth stocks, but it still has lower returns than small and value stocks over the past 20 years. Fortunately, most high-quality, short-term bonds held up extremely well, and many were positive for the quarter. This is why we own high-quality bonds–to provide a place to get funds should you need withdrawals during stock market declines.
What does all this mean for investors? First, stay in your seat, as selling out of your stocks now means you will not participate when an eventual recovery happens. A recovery in the markets will very likely happen before the actual economy recovers, and the market can move sharply upward like we saw in late spring 2009. In fact, the S&P 500 gained almost 18% in three days just last week.**
Second, we have been rebalancing your portfolios to take advantage of lower stock prices. History has shown repeatedly that this disciplined strategy has helped portfolios recover faster from downturns once the stock market rebounds. Third, for those with non-retirement investment accounts, we have been tax loss harvesting to help lower your 2020 taxes. This will prove extremely valuable this year.
This is a moment of great anxiety for everyone. We are faced with concerns about our health, and the health of our friends and family, and also the financial stress of an economy at standstill and a market downturn. But rest assured, we have built your financial plans to withstand this and we encourage you to reach out if you are feeling anxious. We find talking through the game plan will provide comfort during these moments.
Dimensional Fund Advisors has been creating some amazing content to help you understand current events and put them into perspective. This Thursday, they will have another live broadcast at 11 AM PST (2 PM EST). Please click here to register for it. Also, take a moment to check out these recent blog posts that feature some of this new DFA content:
- Dimension Fund Advisors webcast on volatility in financial markets and what it means
- Do Downturns Lead to Down Years?
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 ADV Part 2A & 2B has been updated recently. You can read the updated version by clicking on this link: ADV Part 2A & 2B.
We greatly appreciate the trust you have placed in us to help guide you forward. Feel free to reach out if you need anything.
*As measured by the Vanguard Total World Stock Index Fund (VTWIX)
**As measured by Vanguard S&P 500 (VFIAX)
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.