During the past quarter, the world-wide equity markets performed fairly well, helping our 1-year returns look very strong. The chart below shows the 3-month, 1-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, 2012
|DFA Fund / Index||3 Month Return||1 Year Return||10 Year Return*|
|S&P 500 Index||6.35||30.20||8.01|
|DFA U.S. Large Value||8.79||34.09||8.69|
|DFA U.S. Small||6.02||32.65||11.23|
|DFA U.S. Small Value||7.41||35.00||11.43|
|DFA Real Estate (REITs)||-0.08||31.97||11.20|
|DFA Int’l Large||6.77||15.12||8.33|
|DFA Int’l Large Value||7.33||11.45||10.03|
|DFA International Small||7.48||12.96||12.28|
|DFA Int’l Small Value||8.21||13.99||12.82|
|DFA Emerging Markets||7.08||17.74||17.48|
|DFA 5-Year Global Bonds||1.78||3.93||4.03|
|DFA Intermediate Gov’t Bonds||1.51||5.08||5.38|
*Note: Returns for periods greater than 1 year are annualized. Top 3 returns are in bold.
As the chart shows, the 1-year returns were exceptionally strong for U.S. stocks and real estate, but we aren’t complaining about the 11%-18% returns from the international markets either. Over the long term, the top performers are still international equities, but U.S. stocks and real estate are starting to catch up as a result of this last year.
A lot of investors with diversified portfolios were surprised and unhappy with their dismal investment returns during the bear market that began in October 2007 and ended in March 2009. Diversification across a wide variety of assets whose long-term returns had low correlation should have protected them from more of the downside, they thought. Some even expected that diversification should have helped them avoid all losses. After all, it meant that if one asset class went down, another went up, right?
Unfortunately, that wasn’t what happened. Virtually all risky assets, even those that had in the past often moved in different directions, fell sharply. In fact, when measured against the returns on U.S. stocks, most other risky assets fell more.
“Investing over the long term will almost inevitably include short-term periods of (sometimes severe) market stress, during which the value of diversification for risky assets is less evident,” says the Journal of Indexes. It looked at the returns of a simple 50 percent U.S. bonds/50 percent U.S. stocks portfolio, and compared it to a more diversified portfolio that included four additional risky but non-correlated asset classes. The simple portfolio produced an average annual long-term return of 9.9 percent. The more diversified portfolio beat it, returning 10.9 percent per year on average, with hardly any added risk.
But during the last bear market, the diversified portfolio did much worse than the simple 50/50 portfolio. The 50/50 portfolio lost 26 percent during the bear market, while the diversified portfolio lost 38 percent. Why? This financial crisis caused a flight to quality, where investors dumped anything that was even slightly risky and stashed their money in government bonds. This demonstrates why investors should hedge their bets with an allocation to bonds, the Journal said. “Investors should recognize that low historical or estimated correlation does not ensure against loss, particularly in times of stress, and that bonds and other low-risk assets can provide valuable protection during such periods,” it said.
Now, we have some exciting news that we’d like to share! First, we recently launched our new website (www.SparrowWealth.com) and we hope that each of you will take some time to get familiar with its many new features. The “What’s New” section on the home page provides an overview of the newest content from our blog, newsletters, and “In the News” section. We have added 3 videos that showcase what sets Sparrow Wealth Management apart from our competitors. Our website has lots of other new content, so please stop by and take a look. Second, we have added a “Client Login” section to our website and we will be rolling this out very soon. This “vault” will provide a secure way for you to access your invoices, agreements, quarterly reports, meeting summaries, and many other SWM documents. Third, we are now able to send you sensitive financial information via email without you having to open it with a password. Some of you may not be able to open these emails from your work computers (due to corporate firewalls), but you should be fine opening them on your home computers.
As I’ve said many times, I feel very fortunate to have such wonderful clients. Thank you so much! Please feel free to call or email if you have questions or you need anything.
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.