During the past quarter, the international markets performed the best, with modest returns in the U.S. markets. 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, 2013
|DFA Fund / Index||3 Month Return||1 Year Return||10 Year Return*|
|S&P 500 Index||5.24||19.34||7.57|
|DFA U.S. Large Value||5.87||29.34||9.27|
|DFA U.S. Small||10.01||32.96||10.64|
|DFA U.S. Small Value||8.25||33.52||10.87|
|DFA Real Estate (REITs)||-3.31||5.02||9.27|
|DFA Int’l Large||11.31||21.97||8.05|
|DFA Int’l Large Value||14.04||25.22||9.24|
|DFA International Small||15.00||27.18||10.84|
|DFA Int’l Small Value||16.42||33.49||11.42|
|DFA Emerging Markets||6.08||1.38||13.26|
|DFA 5-Year Global Bonds||0.91||0.08||3.56|
|DFA Intermediate Gov’t Bonds||0.44||-2.79||4.68|
*Note: Returns for periods greater than 1 year are annualized. Top 3 returns are in bold.
As the chart shows, the 1-year returns this year were exceptionally strong for U.S. and international stocks. Emerging markets and real estate delivered positive—yet low—returns. Fixed income was down slightly due to interest rate uncertainty. Over the last 10 years, the top performers continue to be small value stocks (both U.S. and international) and emerging markets, with the rest of the stock asset classes doing very well. Bonds have ranged from 3% – 6% over the long term.
With such strong results this year, it reminds me of the old saying, “No risk, no reward.” Simply put, investors who have taken risks in the stock market this year have been rewarded, while those who sought “safety” in fixed-income investments haven’t made much at all. The Federal Reserve cut short-term interest rates to nearly zero five years ago. Even a small rise in long-term rates can hurt fixed-income investments, and that’s what happened this year. We have kept the maturity of our bond investments fairly low, given the likely increase in interest rates, but it is not possible to entirely eliminate its effects unless everything goes into cash. And that isn’t much of a haven: the Fed has promised to keep bank rates at zero for another two years. You make no interest on cash and its value gets eaten away by inflation.
Why did stock markets go up in the third quarter? Europe’s economy started growing again and its stock markets enjoyed double-digit returns: It appears the European debt crisis of years past is over for now. Small stocks have soared this year, with some of our domestic small stock investments growing by almost 30 percent year to date. Can all of this continue, given that many market indexes are at record highs? We don’t know, but as long as inflation is subdued, interest rates remain under control, corporate profits continue to grow, and the real estate market keeps recovering, then, yes, it can, despite government shutdowns and a potential debt limit crisis.
As we write, the U.S. government is in the first week of its shutdown. We expect the stock market effects to last for only a short period and think it will make very little difference years hence to patient investors. The last time the U.S. government shut down was in January 1996. The Standard & Poor’s 500 Stocks Index stood at 616. At the end of the third quarter of 2013 it stood at 1682, a gain of 173 percent. It is a reasonable assumption that the market will be significantly higher in another 17 years. Incidentally, the S&P 500 dropped almost 4 percent during that 1996 shutdown, but gained over 10 percent in the following month for a quick recovery.
Meanwhile, the bone of contention in the Congressional budget battle, the Affordable Care Act, went into full swing on Oct. 1. Individuals and families who don’t get health insurance from their employers can buy it through the state or federal insurance exchanges that went live that day. The exchanges are online shopping places where you can compare insurance plans and rates, and then sign up for the coverage you want. If your state is not operating its own insurance exchange, you can go to http://www.healthcare.gov. The government will subsidize the insurance premiums for many buyers. We especially encourage young workers without health plans to check out their options on the exchanges.
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.
Enjoy your fall!
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.