During the past quarter, the best performing asset classes were U.S. large growth stocks, large value stocks, and U.S. small stocks. The following chart shows the 1-year, 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, 2018
|DFA Fund / Index||1 Year Return||5 Year Return||10 Year Return*|
|S&P 500 Index||17.91||13.95||11.97%|
|DFA U.S. Large Value||11.34||11.82||11.29%|
|DFA U.S. Small||12.93||10.80||12.40%|
|DFA U.S. Small Value||9.79||9.31||10.81%|
|DFA Real Estate (REITs)||4.38||9.44||7.66%|
|DFA Int’l Large||3.08||4.50||5.23%|
|DFA Int’l Large Value||1.90||4.08||4.82%|
|DFA International Small||1.00||7.10||8.87%|
|DFA Int’l Small Value||-3.00||6.59||8.51%|
|DFA Emerging Markets Core||-2.48||3.57||6.17%|
|DFA 5-Year Global Bonds||0.29||1.68||3.04%|
|DFA Inflation Protected Bonds||-0.05||1.23||3.43%|
*Note: Returns for periods greater than 1 year are annualized. Top 3 returns are in bold.
Patience is a cardinal virtue when investing, especially when you are using a diversified portfolio that spreads your money around the globe. If there’s anything our firm has learned in nearly 18 years of helping investors, it is this: Your life goals are not dependent on the day-to-day performance of the stock market! You need to provide for your family and to take care of yourself in old age. For that you need protection from the ravages of inflation and a steady source of spendable money to meet your needs. That is an entirely different goal than matching or beating “the stock market.” If you make your goal to keep pace with “the market” (too often mistakenly identified with the performance of the Dow Jones Industrial Average or the S&P 500), it is likely that your real goal of financial security will be frustrated.
We bring this up now because we have also learned through experience that it takes a highly diversified portfolio—one that invests in a lot of stocks and bonds NOT included in the Dow or the Standard & Poor’s 500 Index—to give you consistent returns that will keep up with inflation, but will not bankrupt you when certain parts of the world’s investment markets inevitably crash. We invest in that highly diversified way knowing that there will be times when it looks like a mistake, because the Dow or the S&P is going up, and the diversified portfolio looks like it is lagging (as has happened this year). We know that will unsettle some investors; that they will think they are making a mistake by sticking with the diversified portfolio.
But our experience through many market cycles, through panics, through bear markets, and through crashes has also shown us that over an investor’s lifetime, the diversified portfolio will hold up better than one that puts all its eggs into one basket, or a portfolio that constantly picks different eggs based on recent short-term trends. It will prevent a portfolio from being devastated during a market crash, will help it recover more quickly from bear markets, and will protect it from the unpredictable fluctuations of individual asset classes.
For over a year now the returns in investment markets have been concentrated in one narrow area: big, high-tech stocks that heavily influence the performance of the S&P 500. Other asset classes have lagged behind, or have lost money. We’ve seen this happen before. The last time trends were this dramatic was 1999, when the dot.com stocks soared. We remember what happened after that: the big indexes lost money for almost three years in a terrible bear market, while our diversified portfolios mostly held their value and recovered more quickly. We are not predicting another imminent bear market, but we are comforted by holding a diversified portfolio, optimistic that our investors will weather the storm and come out ahead.
We urge you to stay the course. Remember that some of your money IS in those parts of the market that are going up. Other parts of your portfolios are in asset classes that—although temporarily depressed—have done better than the S&P 500. There will come a time when those high-flying tech stocks drop back to earth, and there will come a time when our value stocks, small stocks, and international stocks will surge ahead. We can’t predict when and how (and we are skeptical about any claims to predict the future) but past experience makes us confident in our investment choices. In the meantime, if you have questions about your portfolio or any specific investment in it, please call us.
Thank you again for your business and your trust.
Enjoy your fall 😊.
About Christopher M. Jones, CFP®
Christopher M. Jones is the Founder and President of Sparrow Wealth Management, a fee-only Registered Investment Advisor in Nevada and Pennsylvania. Before entering the investment management field, Mr. Jones was a consultant for Monitor Company, a strategy consulting firm in Cambridge, MA. Mr. Jones graduated summa cum laude from Brigham Young University with a B.S. in Economics and a minor in Business Management. Mr. Jones is a CERTIFIED FINANCIAL PLANNERTM practitioner.