Client Letter – Q2 2017

During the past quarter, the best performing asset classes were international large value, international small, and international small value stocks. The following chart shows the 1-year, 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, 2017

DFA Fund / Index1 Year Return5 Year Return*10 Year Return*
S&P 500 Index17.9014.637.18
DFA U.S. Large Value20.8616.136.25
DFA U.S. Small21.5614.617.95
DFA U.S. Small Value21.8613.975.89
DFA Real Estate (REITs)-1.969.325.75
DFA Int’l Large20.068.311.32
DFA Int’l Large Value25.928.260.03
DFA International Small24.0712.263.69
DFA Int’l Small Value28.8013.743.55
DFA Emerging Markets Core21.944.692.77
DFA 5-Year Global Bonds-0.141.893.30
DFA Inflation Protected Bonds-0.890.224.51

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

The great bear market of 2008 is beginning to seem like a distant memory.  The biggest decline in the American stock market since the 1930s caught many by surprise and resulted in devastating losses for those investors who sold out at market lows and didn’t reinvest in time to catch the market’s upturn in 2009. Those who stayed invested—especially those who took the opportunity to rebalance their portfolios to maintain their stock allocations—came out just fine. But even for those investors there are few fond memories of 2008, when it looked like capitalism was teetering on the edge of an abyss.

As we enter the ninth year of this bull market, it is worthwhile considering whether to expect another major downturn in the near future. All investors should be clear on one point: a significant drop in stock prices, perhaps even something as big as 2008, is virtually certain to happen at some point. The laws of market cycles have not been repealed. A recession or a sudden shock to the financial system will set off a decline that will last for months or even a year or more. That’s just the nature of investing.

The big question for some investors is how soon? Right now, there are few indications that the economy is about to tank or that an investment bubble is about to burst. The U.S. economy continues to plug along at a little less than a 2% growth rate, just as it has since 2009. Despite some small moves by the Federal Reserve, interest rates remain low, inflation appears to be contained, consumer demand is strong enough, and corporate profits keep rising. Those are the conditions that a bull market needs, even if this one has become the second-longest in modern history. But as Federal Reserve Chair Janet Yellen keeps reminding us, bull markets don’t die of old age.

Nevertheless, we think investors should remain realistic. Stock valuations are at the high end of their historic ranges, and the hoped-for stimulus that some expected from the new Administration has fizzled out amidst scandals, investigations, and the usual Washington dysfunction. This is a time to stick to your long-term plan and the investment allocation you have chosen. Getting too exuberant about stocks will expose you to more risk and loss when markets eventually decline; getting too conservative will deny you the profits that will come if the bull market continues. Selling out is not an option unless you’ve got to spend all your money very soon. Yes, not being in the stock market will help you avoid a market downturn, but it also will guarantee you low returns and, in our experience, expose you to the almost impossible decision of when to get back into stocks. Over the years we have seen investors continue to sit in cash months and years after a bull market begins, as they fretted about risks and refused to believe a recovery had arrived. Markets tend to recover in an unexpected, swift, and dramatic fashion after downturns, catching investors by surprise and punishing those who aren’t invested.

The biggest investment lesson we have learned over the years is that the capital markets will reward those who take risks and stay invested through downturns. Trying to avoid risk may make you feel good temporarily, but your returns will suffer. Remember that you don’t have to sit by as a passive observer. You can ensure success by continuing to save money if you can, keeping spending at reasonable levels, and allowing us to periodically rebalance your portfolio.
Thank you for your business and your trust. Please don’t hesitate to call or email if you want to discuss something.

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.

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