Client Letter – Q2 2009

During the past quarter, we have witnessed the strongest rebound since the markets began falling in late 2007. Global stock markets climbed sharply in April and May, and then held onto most of their gains during the month of June.  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 June 30, 2009

 DFA Fund / Index 3 Month Return 5 Year Return* 10 Year Return*
S&P 500 Index15.93-2.24-2.22
DFA U.S. Large Value23.58-2.601.00
DFA U.S. Small25.94-1.714.66
DFA U.S. Small Value23.94-3.156.32
DFA Real Estate (REITs)30.55-3.095.47
DFA Int’l Large25.172.651.53
DFA Int’l Large Value33.933.895.31
DFA International Small31.494.107.02
DFA Int’l Small Value31.785.189.06
DFA Emerging Markets33.1414.478.90
DFA 5-Year Global Bonds1.433.954.65
DFA Intermediate Gov’t Bonds-1.055.856.73

*Note: Returns for periods greater than 1 year are annualized.  Top 3 returns are in bold.

As shown above, international stocks (including emerging markets) continue to perform the best, but all parts of the stock market did very well this quarter. International small stocks and emerging markets stocks have been the best performing asset class over the last 10 years.
However, the last 10 years have been a miserable time to invest in U.S. stocks. Mutual fund manager JennisonDryden estimates that U.S. stocks (as measured by the Standard & Poor’s 500 Index) lost roughly 3 percent per year on average from April 1999 through March 2009. That’s a far cry from the average annual return of 9 percent from 1929 to the present.

JennisonDryden studied all 10-year monthly rolling periods from October 1929 to the present to see how U.S. stocks did during the subsequent 10-years after each bad 10-year period. It found that it is not uncommon to have moderate to poor returns for as long as 10 years. Out of 715 rolling 10-year spans, it found 91 periods when average annual returns were 5 percent or less. JennisonDryden dubbed those “muted return markets.”

The good news for investors who survive those low-return periods comes over the subsequent 10 years, when the market rises by an average annual return of 15 percent, the study found. The worst 10-year recovery period, which started in October 1939 at the end of the Great Depression, saw annualized returns of 8 percent a year, far better than the average annual loss of 3 percent per year in the 10 years from the Crash of 1929 through 1939. Although 8 percent a year may not seem like a spectacular return, it would more than double an investor’s principal.
Another 10-year period of muted returns saw stocks rise by only 4 percent a year from June 1964 through May 1974, a period of rising unemployment, an oil shortage, and rising inflation following the Vietnam War. But the subsequent 10-year period saw stocks increase by an average of 11 percent per year.

One of the best recoveries came after the period from August 1972 through July 1982. That muted period saw returns of only 5 percent a year, but the following 10 years through July 1992 produced U.S. stock returns of 19 percent per year on average. While future returns are never guaranteed, investors who suffered through the last 10 years have cause for optimism about the future.

On a personal note, I will be taking some short trips during July and August.  During these trips, I should have access to email and voicemail, but it may take a day or two to get back to you.  If you have an urgent matter, send me an email and mark it urgent.
Thank you for your continued trust and confidence.  As always, feel free to call or send an email if you need anything.


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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.