Client Letter – Q2 2014

During the past quarter, REITs performed exceptionally well, with emerging markets stocks coming in with respectable returns also. The U.S. and international markets delivered positive returns in all asset classes. 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, 2014

 DFA Fund / Index 3 Month Return 5 Year Return* 10 Year Return*
S&P 500 Index5.2318.837.78
DFA U.S. Large Value5.6422.069.03
DFA U.S. Small2.2422.499.73
DFA U.S. Small Value3.2723.409.32
DFA Real Estate (REITs)7.1823.549.42
DFA Int’l Large4.4811.747.10
DFA Int’l Large Value4.0311.507.63
DFA International Small2.5615.499.64
DFA Int’l Small Value1.9515.7810.35
DFA Emerging Markets6.8410.0812.25
DFA 5-Year Global Bonds1.173.753.85
DFA Inflation Protected Bonds3.985.94N/A

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

Once again world stock and bond markets defied expectations and gained ground during the second quarter. We say “once again” because the predictions of imminent declines for both stocks and bonds have been coming fast and furious since the beginning of the year. And yet, during a calendar quarter that historically has been a loser more often than a winner—and even after economic statistics showed the economy moved backwards at the beginning of the year—we are sitting mid-year with respectable gains in most markets.

Given recent history, expectations for declines seemed reasonable. The U.S. stock market (as measured by the Standard & Poor’s 500 Stocks Index) climbed a remarkable 32 percent last year with hardly a pullback. Going into January—which, incidentally, was the only month this year so far to experience a stock market decline—it was reasonable to expect a correction of 10 percent or more. Not a chance: instead, the S&P 500 is up about 6 percent this year. Meanwhile, with record low yields on bonds and the Federal Reserve’s decision to begin pulling back its support of high bond prices, experts were certain bonds would begin losing money. It didn’t happen. Long-term bond yields fell even further and bonds gained ground, with the Barclays Aggregate Bond Market Index—a broad average of the domestic bond market—gaining 3.9 percent through June 30.

Note that we keep our bond maturities shorter than that of the broad bond market because we want bonds to add stability to our portfolios. That means we earn less when the broad bond market is up but lose less when it falls. We would rather take risks in stocks and real estate, and we have been amply rewarded in both areas over the last five years.

We never pretend to know what’s going to happen next, but we wouldn’t be surprised if we had some kind of temporary stock pullback later this year. If so, it is best not to react. Instead, we will continue to regularly rebalance your portfolio when necessary, a practice that should keep your risk level from rising and which forces us to sell some assets when they are high, and to buy others when they are low.

Meanwhile, if you or someone you know is nearing retirement, please don’t make any hasty decisions when claiming Social Security. You and your spouse have numerous options for beginning Social Security anytime between ages 62 and 70. The optimal age to begin taking this important benefit varies widely among individuals and couples. It may even be best to delay your own benefit while claiming part of your spouse’s benefit. There is no easy “one size fits all” answer: Everyone should take a close look at their personal situation before deciding what to do. Social Security’s employees can explain your options, but they aren’t allowed to help you pick the particular strategy that is right for you.  Please call us so that we can help you make the best choice, and ask your loved ones and acquaintances to do the same.

Thank you for your continued trust and confidence.  As always, please don’t hesitate to call if you need to discuss something or you’re just worried about the markets—that’s what we are here for.

Enjoy the rest of your summer!

Chris signature


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.