Client Letter – Q3 2010

During the past quarter, we have witnessed an amazing 3-month rebound, in stark contrast to what happened in the prior quarter. In fact, the month of September will go down in history as the strongest September since 1939. 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, 2010

 DFA Fund / Index 3 Month Return 5 Year Return* 10 Year Return*
S&P 500 Index11.290.64-0.43
DFA U.S. Large Value11.15-0.585.01
DFA U.S. Small11.952.215.81
DFA U.S. Small Value12.46.499.02
DFA Real Estate (REITs)13.181.5710.14
DFA Int’l Large17.012.762.93
DFA Int’l Large Value18.373.667.47
DFA International Small17.544.389.92
DFA Int’l Small Value16.353.6312.04
DFA Emerging Markets18.2813.0713.72
DFA 5-Year Global Bonds3.124.905.03
DFA Intermediate Gov’t Bonds3.076.927.16

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

As shown above, the international asset classes performed much better than the U.S. markets, even though all equity asset classes did very well last quarter.  The top performing asset classes were international large value, international small, and emerging markets stocks. Real estate, international small value, and emerging markets stocks have been the best performing asset classes over the last 10 years.  Notice that the 5 and 10 year annualized returns for the S&P 500 Index are still close to 0%.

Achieving a successful retirement has become a lot harder lately, and recent trends have made retirement preparations more critical. Longer life spans, lower returns on Social Security, the decline in pension plans, and the aging of the Baby Boom generation have created “the perfect storm for those planning to retire over the next few decades,” say David F. Babbel of The Wharton School and Craig B. Merrill of Brigham Young University. “Five forces are converging upon Americans in what some have called the Perfect Storm—others the Tsunami Wave—that is about to engulf us from all sides,” they wrote in a policy brief published by the Wharton Financial Institutions Center.

They say that people who are working now will get a much lower return on their Social Security contributions than their parents received. That will happen because current workers are paying higher taxes and are subject to later retirement ages than were their parents. The Social Security Administration estimates that low-income workers will get only a 2.8 percent rate of return on their Social Security contributions, while higher income workers who pay the maximum yearly Social Security tax will get returns of just 0.4 percent.

The demise of traditional pension plans will also hurt many retirees. Traditional pensions were offered by 175,000 employers in 1983; now there are less than 25,000 pension plans that guarantee lifetime benefits. Even worse, about 30 percent of the remaining pension plans have said they will close within two years, and some of those that remain are either insolvent or underfunded. There are serious implications for retirees: under traditional pensions a retiree could not outlive his income. Under 401k and other contributory plans, a retiree can easily spend everything before death.

Longer life spans are also going to bedevil future retirees. Since 1940, the number of months of life expectancy for those age 65 has increased by 50 percent. When Social Security began, the average person did not even live until 65. This increased longevity has placed a big strain on the Social Security system. Meanwhile, the average lifespan of a man at 65 is now age 86 and for a woman it is close to 88.

Finally, the aging of the Baby Boomers means that a much larger percentage of the U.S. population will be placing a strain on Social Security, just as the emergence of a much smaller post-Boomer generation will mean there are fewer workers to support Social Security. The end result likely will be lower benefits or delayed benefits for many current workers.

In summary, workers who want to retire someday should take several actions to ensure retirement success. First, savings rates need to increase. The gold standard for retirement savings traditionally has been 10 percent of income. Today, as much as 15 or 20 percent may be more prudent. Second, early retirements may become a thing of the past for many workers, and it may become commonplace to work until age 70 or later (see Mitch Anthony’s book, “The New Retirementality”).  Third, updating your retirement plan every 3-5 years will help you to know where you stand.

Fortunately, it has shaped up to be a very good year for Sparrow Wealth Management—in terms of the growth of our clients’ portfolios, as well as new clients who have come on board.  Please continue to use our website ( and our Facebook page to tell your friends about your experience with SWM. Your continued trust and confidence is greatly appreciated.  As always, feel free to call or send an email if you need anything.

Happy Halloween!

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.