Client Letter – Q4 2009

During the past year, we have seen an amazing recovery from the financial crash of 2008, especially when you look at your investment returns since the low point in March 2009. 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, 2009

 DFA Fund / Index 1 Year Return 5 Year Return* 10 Year Return*
S&P 500 Index26.46.42-.95
DFA U.S. Large Value30.19-.144.39
DFA U.S. Small36.34.915.72
DFA U.S. Small Value33.62-.259.13
DFA Real Estate (REITs)28.17-.0110.48
DFA Int’l Large30.644.041.42
DFA Int’l Large Value39.454.996.67
DFA International Small41.965.108.68
DFA Int’l Small Value39.515.7911.27
DFA Emerging Markets71.7714.769.50
DFA 5-Year Global Bonds4.193.804.76
DFA Intermediate Gov’t Bonds-.725.266.91

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

As shown above, international small and emerging markets stocks had the best performance in 2009, in addition to solid results in the U.S. and across the globe. Despite the 2008 crash, real estate was still among the best performing asset classes over the last 10 years, in addition to international small value and emerging markets stocks.  It is easy to see why the “general public” is disappointed with their investment performance during the last decade….since they probably had the majority of their portfolio in the S&P 500.  This was the only major asset class that had a negative annualized return over the last 10 years!  On the other hand, a well-diversified portfolio would have earned between 6 and 9 percent annually during this period!  If you’ve been with my firm since 2003 or earlier, then you should see these returns in your own portfolio.

Does two major bear markets in 10 years, and the recent whipsaw when stocks fell sharply in 2008 and rose sharply in 2009, mean that “buy and hold” investing is dead? A lot of pundits are saying so. As mentioned above, investors who held S&P 500 stock portfolios over the last 10 years lost money, they argue. Those who sold when things turned sour and bought back in on the recovery did better, protecting their capital while enjoying some nice gains. These arguments pop up periodically during bad times for U.S. or global markets. The last long period of doubt corresponded with the high inflation years and successive bear markets that lasted from the early 1970s through mid-1982.

Some of the most successful academics and investment managers recently told the Journal of Indexes that buy and hold investing remains valid for a well-diversified, global portfolio of stocks and bonds. “I almost have to laugh when I get a question like that,” said Larry Swedroe of BAM Advisor services in reaction to the “Is buy and hold dead?” question. “Whenever we get some kind of crisis, all those who believe in active management come out of the woodwork with this nonsense. All that shows is that they don’t know the basics of investing.” Burton Malkiel of Princeton University and author of “A Random Walk Down Wall Street” said it is natural for people to say they should have sold in late 2007 and bought back in at the bottom this past March.“ We all have 20/20 vision in retrospect. The problem with it is that nobody, and I repeat, nobody can time the market,” he said. Jeremy Siegel of the Wharton School and author of “Stocks for the Long Run” noted that the recent bear market reaffirmed that stocks pay high long-term returns because they can be very risky in the short term. Buy and hold investing also prevents investors from making errors when the going gets tough, says Gus Sauter of the Vanguard Group. “A buy and hold strategy helps prevent us from acting in a knee-jerk fashion and under-performing” by making bad decisions when the market soars or falls,” he said.

Now, I have included several important tax-related documents in this quarterly mailing. First, for clients with taxable losses or gains, I have provided a Realized Gains and Losses report, which shows the net proceeds and cost basis for taxable securities that were sold during 2009. Second, for clients who do not deduct our fees from an IRA account, I have provided a report that shows the investment fees you paid during 2009. Make sure that you give these reports to your accountant or tax preparer. I will also send a copy of these tax reports to your accountant, if you have authorized me to do so.

As you are aware, we are in the middle of registering Sparrow Wealth Management with the SEC.  As soon as this is complete, we will send out new agreements, investment policy statements, and quarterly bills.  Finally, please begin using our new toll-free number: (877) 330-9191, and feel free to share it with your friends.

Best wishes,

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.