Client Letter – Q3 2006

We enjoyed a strong quarter, despite the slow start in July, as evidenced in the chart below.  Even large U.S. stocks (represented by the S&P 500 Index) did well this quarter, which was a pleasant surprise!  Nevertheless, the international asset classes (small, small value, and emerging markets) still have the highest 5-year returns of any asset class.  Also, bond returns were much stronger this quarter.  Our diversification strategy has continued to be extremely profitable. The following chart shows the recent performance of many DFA funds (representing different asset classes) compared to the S&P 500 Index:

Market Returns for the period ending September 30, 2006

 DFA Fund / IndexQuarterly Return 1 Year Return 5 Year Return*
S&P 500 Index5.6710.796.97
DFA U.S. Large Value2.9012.7113.16
DFA U.S. Micro Cap-0.217.9217.53
DFA U.S. Small Cap Value-0.7012.0220.94
DFA Real Estate (REITs)9.2126.8322.30
DFA Int’l Large3.6818.9013.79
DFA Int’l Large Value6.4725.8420.61
DFA International Small2.2918.1823.77
DFA Int’l Small Value3.1519.7727.32
DFA Emerging Markets6.4218.6726.99
DFA 2-Year Global Bonds1.414.012.78
DFA 5-Year Global Bonds1.942.914.14

*Note: Returns for periods greater than 1 year are annualized.  Top 3 returns are in bold.
The Dow Jones Industrial Average closed at a record high on Tuesday, October 3, 2006, exceeding the previous peak set January 14, 2000 by a small margin.  Other popular benchmarks remain well below their previous records, as shown in the chart below.

 IndexRecord High Date Closing Price Oct 3, 2006 Change
Dow Jones Industrial AverageJanuary 14, 200011722.9811727.34+0.04%
Dow Jones Wilshire 5000 IndexMarch 24, 200014751.6413305.78-9.80%
S&P® 500 IndexMarch 24, 20001527.461334.11-12.66%
NASDAQ Composite IndexMarch 10, 20005048.622243.65-55.56%

Although the Dow has recouped all of its losses over a period lasting nearly seven years, I suspect most investors who were seeking to outperform the average over this period (by selecting the most promising stocks from among the 30 components) have found the task much more challenging than expected: only ten stocks in the average were higher on October 3, 2006 than on January 14, 2000, and the list of winners and losers will take many investors by surprise. Those who avoided companies hawking cigarettes or bulldozers in favor of more glamorous industries such as healthcare, financial services, retailing, and technology missed out on the two best performers. Those who correctly predicted a surge in the price of oil and the bankruptcy of several major airlines presumably avoided companies selling expensive new jets and the engines that fly them. That decision would have eliminated the next two best performers. To top if off, one of the world’s most innovative and most profitable companies came in dead last, with the share price crumbling over 60%.

So, the next time someone tells you “a rising tide lifts all the boats,” take out this list.  The worst-performing Dow Jones components during the period from January 14, 2000 to October 3, 2006 were Intel (-60.1%), General Motors (-59.4%), Microsoft (-59.4%), Home Depot (-40.5%), and Merck (-40.2%).  The best-performing Dow Jones components were Altria (211.9%), Caterpillar (150.7%), United Technologies (103.1%), Boeing (85.9%), and Exxon Mobil (56.2%).

As for recent news, Keystone Financial Planning’s Grand Opening took place on October 12, 2006, from 5:00 PM to 7:00 PM.  It was a historic event for my family and me.  We had over 80 people in attendance, including many clients, friends, business associates, local business owners, and political representatives.  Congressman Charles Dent and Representative Douglas Reichley presented certificates to Keystone Financial Planning in recognition of the opening of our Macungie office.  Mayor John Horner welcomed my firm to the Borough of Macungie.  Tami and our two older daughters (Holly and Amanda) participated in the ribbon-cutting ceremony.  I appreciated the support of so many clients, many of whom lived too far to attend the actual event, but who were there in spirit.

Thank you for your continued trust and confidence.  Please 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.