Happy New Year! After reviewing my clients? performance reports, I am almost speechless (which is a rare occurrence)! This past year will surely go down in the record books as one of the best ever, especially for well-diversified investors.
But, before we get too excited, let’s see if there is something we can learn from the events of 2003. Take just a minute to remember the grim, dark days in the weeks leading up to the brief March war in Iraq. Were you predicting then that this would be such a great year for stocks? I doubt it. In fact, everyone was worried that we would see yet another bear market year, and that the war and a messy aftermath would hurt the economy. Add to that all of the bad news we’ve seen this year: the worldwide SARS epidemic, mad cow disease hitting the United States, a deteriorating job market, the plunge in the U.S. dollar, record trade deficits and a skyrocketing federal budget deficit, mutual fund scandals, a major scandal at the New York Stock Exchange, Michael Jackson accused of child molestation, etc. It was enough to make you hide under the covers!
This proves a point that I cannot emphasize enough. There is always bad news and you cannot use it to predict the stock market. The worst mistake an investor can make is to try to make predictions, period. The most common mistake is to try to figure out how current news— good or bad—will affect stocks. If you looked at the news we had this past year without knowing what the market was doing, you would have thought it would be the worst year yet for stocks. It was far from that! The major indexes soared. The NASDAQ, so heavily pounded during the three year bear market, gained 50% during the year and was up over 80% since the bear market low of Oct. 9, 2002.
This past year, diversified portfolios did far better than the broad U.S. market, but with much less risk, because they were composed of a variety of asset classes, most of which earned higher returns than the S&P 500 Index. The following chart shows the recent performance of many DFA funds (representing different asset classes) compared to the S&P 500 Index:
Market Returns for the period ending December 31, 2003
|DFA Fund / Index||1 Year Return||3 Year Return*||5 Year Return*|
|S&P 500 Index||28.69%||-4.05%||-.57%|
|DFA U.S. Large Value||34.43%||5.92%||6.54%|
|DFA U.S. Micro Cap||60.70%||19.60%||16.44%|
|DFA U.S. Small Cap Value||59.39%||21.04%||16.93%|
|DFA Real Estate (REITs)||35.58%||16.92%||15.00%|
|DFA Int’l Large||36.70%||-2.59%||0.43%|
|DFA Int’l Large Value||49.94%||5.15%||6.18%|
|DFA International Small||58.79%||13.14%||10.79%|
|DFA Int’l Small Value||66.46%||18.89%||14.15%|
|DFA Emerging Markets||60.18%||10.58%||10.47%|
|DFA 2-Year Global Bonds||1.92%||4.40%||4.85%|
|DFA 5-Year Global Bonds||2.96%||6.37%||5.89%|
*Note: Returns for periods greater than 1 year are annualized. Top 3 returns are in bold.
What an amazing year! In fact, you might even be wondering why you own bonds after looking at the above chart. Well, the bonds help you to “emotionally” survive when the stocks are down, like they were during the recent bear market. All of my clients’ portfolios were spared steep loses during the bear market because they had between 30%-70% of their portfolio in short-term bonds. Since you never know what the future holds, it makes a lot of sense to own some bonds (the amount depending on your tolerance for risk). Ironically, a diversified portfolio (using DFA funds) that had 40% in bonds would have earned about the same return in 2003 as the S&P 500. This is why I believe in diversification—it provides superior returns with less risk.
I have included several things in this quarterly mailing. First, for clients with taxable accounts, I have provided a Realized Gains and Losses report, which shows the net proceeds and cost basis for taxable securities that were sold during the past year. Also, I have provided a report that shows the fees you paid during 2003. Make sure that you give both of these reports to your tax accountant, if you use one. Finally, I have included a sample of a recent marketing flyer that has been sent to about 5,200 businesses in the Lehigh Valley. If you would like to have more copies of this flyer to give to your friends and business associates, please let me know.
The mission of Keystone Financial Planning is to help you to find freedom and peace in your financial life. If my services are helping you to achieve these things, then don’t forget to tell your friends and associates about your experience. Did you know that most consumers do not even know that “fee-only” advisors exist? My website (www.KeystoneFP.com) provides an easy way for your friends to learn more about my services.
As we start a new year, I am working hard to improve the quality and value of my services. I welcome your feedback. Let’s work together to make it great year!
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.