Client Letter – Q3 2009

During the past quarter, we have witnessed another amazing 3-month rebound, in addition to last quarter. 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 September 30, 2009

 DFA Fund / Index 3 Month Return 5 Year Return* 10 Year Return*
S&P 500 Index15.611.02-0.15
DFA U.S. Large Value21.951.404.42
DFA U.S. Small21.453.037.15
DFA U.S. Small Value26.832.019.53
DFA Real Estate (REITs)33.831.159.52
DFA Int’l Large18.746.492.86
DFA Int’l Large Value24.268.367.10
DFA International Small20.408.148.70
DFA Int’l Small Value24.389.8111.12
DFA Emerging Markets21.5717.1111.65
DFA 5-Year Global Bonds2.413.844.82
DFA Intermediate Gov’t Bonds2.435.536.92

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

As shown above, U.S small value, real estate, and international small value stocks had the best performance this last quarter, but all parts of the stock market did very well. U.S. small value, international small value, and emerging markets stocks have been the best performing asset classes over the last 10 years.

Given what has happened during the last two quarters, I feel compelled to restate my own commentary from two previous emails.  I feel that this is one of the most important educational experiences that investors will have during this century, so please save this letter for future reference.

First, I’d like to republish part of an email that I sent out on March 18, 2009:
“This is a historic (and painful) time, as you all know.  Many important decisions will be made in 2009 that will set the stage for a strong recovery within the next few years (as close as I’ll come to making a prediction).  The last week or so has shown that worldwide investors are looking for the right time to re-enter the markets, even though most of them will miss it.  There are many positive signs that confidence is building. I have been slow to rebalance from bonds into stocks since the end of 2008 for many reasons, but I am going to be doing so during the next few days.  If any of you are uncomfortable with my intention to rebalance your portfolio back to its long term asset allocation (based on your investment policy statement), please let me know ASAP!!  For those of you that have cash that you can invest for the long term, I would strongly recommend doing so now.  Let me know ASAP if you intend to send money in (so I can include this in the rebalancing process).

No one can predict the future, but the market is at historic lows right now and we MAY NEVER have this opportunity again.  Sure, it could go lower, but at some point the market will have a strong rally and it may never return to these kind of lows again.  Personally speaking, this is one of the few times that I may use leverage to increase my own exposure to the markets because I firmly believe that the markets will recover over the next 5 years and long term investors will be strongly rewarded for market risk.  As I have always advised, you should NOT take market risk with money that you need in the short term (i.e. within the next 5-10 years), so resist the urge to take more risk than is prudent for your situation.”

Second, I’d like to republish part of a recent email I sent on September 10, 2009:

“Since that time [3/18/09], global capital markets have made an amazing recovery, and I want to commend all of you for sticking to your asset allocation during some of the darkest days we’ve seen since the 1929 stock market crash.  While no one could have predicted such a fast recovery, you prepared for it by following a disciplined investment strategy and avoiding the common pitfalls that affect the majority of investors.  For those of you that followed my advice to invest additional money as the markets fell, you have been rewarded with 40-50% returns on that money during the last 6 months.  You also recovered much faster if you allowed me to rebalance your portfolio as the market fell (enabling you to buy stocks at bargain prices).  Again, I want to congratulate all of you for surviving this horrific financial crisis, and I hope that this experience has helped to build your confidence in the fundamental investment principles that KFP is based on.

As a result of this quick recovery, most of the portfolios that I manage are now over weighted in equities and need to be rebalanced into bonds.  For those clients that I have already transitioned to the new DFA “core” funds, I plan to wait until you’ve owned these funds for at least one year before rebalancing the funds that are in your taxable accounts.  For those PA clients that I still need to transition, I am in the process of doing this for many of you.  Please be patient, as this is a very time-consuming process.”


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.