Client Letter – Q3 2019

During the past year, the best performing asset classes were real estate and fixed income (bonds).  The following chart shows the 1-year, 10-year, and 20-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, 2019

DFA Fund / Index1 Year Return10 Year Return*20 Year Return*
S&P 500 Index4.2513.246.33%
DFA U.S. Large Value-1.9112.198.24%
DFA U.S. Small-10.3711.579.34%
DFA U.S. Small Value-13.7410.039.78%
DFA Real Estate (REITs)21.6413.3811.44%
DFA Int’l Large-2.044.863.86%
DFA Int’l Large Value-8.413.355.21%
DFA International Small-7.656.897.79%
DFA Int’l Small Value-11.175.778.41%
DFA Emerging Markets Core-2.133.647.57%
DFA 5-Year Global Bonds5.172.793.80%
DFA Inflation Protected Bonds7.823.65N/A

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

The ancient Greek philosopher Heraclitus is quoted as saying “the only thing that is constant is change.” As in life, the investment world is constantly in flux.  Most investors hate this because we want certainty in our lives, especially when it comes to our money.  People want to invest, have those investments go straight up, and never face even a minor decline. This utopia doesn’t exist when it comes to the stock and bond markets. The reality is that the hot investment category of yesterday is unlikely to continue to dominate tomorrow.

Taking the long-term view can help investors recognize this concept.  According to the white paper, “A Tale of Two Decades: Lessons for Long-Term Investors” by DFA, from January 2000 to December 2009, the S&P 500 earned a -.95% annualized return, while US large value, US small, international small, international small value and emerging markets all out-performed. Ten years of investing in the S&P 500 and you still lost money. The prior decade, during the booming 90’s, the S&P 500 was on fire. Few predicted the “lost decade,” but the diversified investor still earned positive returns despite the S&P 500’s poor showing.

We mention this as a reminder, now that the S&P 500 has dominated from January 2010-June 2019, with an annualized return of 13.08%.  Virtually all other investment categories have lagged over the same period. Taking the full twenty-year view of 2000-2019, the S&P 500 has earned a respectable 5.65% annualized return, but the previously mentioned categories all outperformed the S&P 500 over the same twenty years. It would have been incredibly easy to reduce returns, increase costs, and increase taxes by chasing performance over this time frame.

In the month of August, there was strong outperformance by US large value and small value stocks. This may be the start of a new investment shift, or it may be a short-term adjustment; either way, we believe a diverse portfolio is the best way to capture future returns. We don’t need to predict which category outperforms next to achieve investment success. We simply need to remain patient, disciplined, and continue to rebalance as needed to help you achieve your goals.  Please take a few minutes to read DFA’s latest white paper, “Value Judgements: Viewing the Premium’s Performance Through History’s Lens,” which puts the returns of value stocks (compared to growth stocks) into historical perspective.  As stated in the paper, “a key to successful long-term investing is sticking with your approach, even though difficult periods, so that you are there for the good times too.”

Thank you again for your business and your trust.

Enjoy your fall 😊.

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.


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