Client Letter – Q4 2006

Happy New Year!  The year 2006 was a great one for equity investors around the world as stock prices rose in 46 of the 50 countries whose equity market returns are reported by MSCI. Among these, only Israel, Jordan, Thailand, and Turkey saw their local stock market indexes slump for the year. The 2006 return for US stocks was 15.32% according to MSCI, placing it next-to-last among 23 developed markets (in dollar terms) and 42nd out of 50 countries in all. There were 36 markets with a total return greater than 20% (in dollar terms), and 19 had a total return greater than 40%. Nine of the top ten were emerging markets.  So, the “moral of the story” for 2006 is that international diversification can pay big rewards!  In fact, international asset classes significantly outperformed their U.S. counterparts over the last five years.

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 December 31, 2006

 DFA Fund / Index 1 Year Return 5 Year Return* 10 Year Return*
S&P 500 Index15.806.198.42
DFA U.S. Large Value20.1812.3711.92
DFA U.S. Micro Cap16.1615.1613.48
DFA U.S. Small Cap Value21.5518.9015.84
DFA Real Estate (REITs)35.2623.3515.17
DFA Int’l Large24.8614.467.93
DFA Int’l Large Value34.1522.2611.58
DFA International Small24.8826.4010.63
DFA Int’l Small Value28.3930.3012.90
DFA Emerging Markets29.1725.8810.16
DFA 2-Year Global Bonds4.462.854.36
DFA 5-Year Global Bonds3.894.335.45

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

Last year, Schwab Institutional announced a new service called eDelivery.  With eDelivery, trade confirmations and statements will be delivered to you electronically.  The benefits of this service include lower equity trading fees, faster delivery, eliminating some of the problems with paper delivery (lost or damaged mail), and reducing the physical storage requirements of documents.  In order to participate in eDelivery, you will need to electronically set up your accounts on www.schwaballiance.comI strongly recommend that you call the Schwab Alliance team at (800) 515-2157.  They will assist you with setting up all of your accounts with eDelivery service.  Please feel free to call me with any questions you may have.

I have included several important tax-related documents 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 2006. Second, for clients who do not deduct KFP fees from an IRA account, I have provided a report that shows the fees you paid during 2006. Make sure that you give these reports to your accountant or tax preparer, if you use one.

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 please take a few moments to refer your friends and associates using the “Refer a Friend” section of the KFP website (  Your referrals over the past five years have contributed to the growth of Keystone Financial Planning, and I am very grateful to all of you.

As we start the New Year, I am working hard to improve the quality and value of my services.  Your feedback is greatly appreciated.  Let’s work together to make 2007 another prosperous year!


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.