The third quarter defied expectations as world stock markets (with the exception of Great Britain) rose in the wake of uncertainties from the spring Brexit vote, the hotly contested U.S. presidential race, the threat of higher short-term interest rates, domestic and foreign terrorist attacks, international banking turmoil, and more. The following chart shows the 3-month, 1-year, and 5-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, 2016
|DFA Fund / Index||3 Month Return||1 Year Return*||5 Year Return*|
|S&P 500 Index||3.85||15.43||16.37|
|DFA U.S. Large Value||5.14||15.08||17.76|
|DFA U.S. Small||7.00||13.82||16.84|
|DFA U.S. Small Value||7.96||13.57||16.45|
|DFA Real Estate (REITs)||-1.17||19.99||15.77|
|DFA Int’l Large||6.19||7.26||7.28|
|DFA Int’l Large Value||8.50||6.10||5.88|
|DFA International Small||8.83||13.71||10.45|
|DFA Int’l Small Value||10.54||10.46||11.47|
|DFA Emerging Markets Core||7.97||18.15||4.13|
|DFA 5-Year Global Bonds||0.00||2.91||2.35|
|DFA Inflation Protected Bonds||0.98||6.67||2.00|
*Note: Returns for periods greater than 1 year are annualized. Top 3 returns are in bold.
Although the third quarter is traditionally the weakest of the year, the large U.S. companies that make up the Standard & Poor’s 500 Stocks Index collectively gained 3.85% with dividends reinvested. This pushed the index to a gain of 7.8% year-to-date and 15.43% over the last 12 months.
The value and small stocks we use to diversify your portfolio did even better. Domestic, international, and emerging markets stocks that are classified as either value or small stocks handily beat the S&P 500 during the quarter, as evidenced by the performance of asset class funds operated by Dimensional Fund Advisors.
It is worth noting that small and value stocks held down our returns over the last several years. Academic research has revealed their long-term advantages, but it is not unusual for them to be out of favor for a period of time. That doesn’t make investors feel better as they watch their portfolios lag behind the broad market, as they did over the last two years. Periods of underperformance are usually followed by extended periods of good returns, and we are confident that over the long term a portfolio that includes small and value stocks will outperform the broad market.
Fixed income investments hardly budged during the quarter, held down by speculation on the timing of the next interest rate increase by the Federal Reserve. All in all, your portfolio, which includes both stocks and fixed income investments, turned in a solid performance for the quarter, and is doing well this year.
The fourth quarter will be interesting, with all eyes focused on the election. Despite the incendiary feelings this time around, we don’t expect any lasting effects on the markets, no matter who is elected. Political events tend to have only short-term effects on asset prices. On the plus side, the fourth quarter is generally one of the best of the year, and stocks generally rise during election years.
The S&P 500 Index gained ground in 13 of 16 fourth quarters during presidential elections since 1952, our analysis shows. Gains ranged from 2% to 10%. The big exceptions were 2000 and 2008. In both years major bear markets were already well underway early in the year and did not relate to the elections. Both years saw the collapse of major investment bubbles—technology in 2000 and real estate in 2008. In the third case, the S&P 500 declined by less than one-half of one percent during the fourth quarter of 2012.
Thank you for your business and your trust. We greatly appreciate it.
Enjoy the beautiful fall season!
About Christopher M. Jones, CFP®
Christopher M. Jones is the Founder and President of Sparrow Wealth Management, a fee-only financial planning and investment management firm based in Hermosa Beach, CA. 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. Chris is a CERTIFIED FINANCIAL PLANNERTM practitioner.