Client Letter – Q4 2012

Wow…what an amazing end to an interesting year! Despite a steady diet of bad news, most markets around the world climbed the proverbial “wall of worry” to log strong returns.  Major markets around the globe delivered double-digit total returns, and as a group, the non-US developed and emerging markets outperformed the US equity market. 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, 2012

DFA Fund / Index 1 Year Return 5 Year Return* 10 Year Return*
S&P 500 Index16.001.667.10
DFA U.S. Large Value22.051.838.41
DFA U.S. Small Cap18.395.5110.84
DFA U.S. Small Cap Value21.724.4711.27
DFA Real Estate (REITs)17.485.7511.41
DFA Int’l Large17.75-2.908.37
DFA Int’l Large Value16.61-4.3110.20
DFA International Small18.86-0.1312.76
DFA Int’l Small Value22.26-0.6213.49
DFA Emerging Markets Core19.160.9017.38
DFA 5-Year Global Bonds4.804.563.95
DFA Inflation Protected Bonds7.457.55N/A

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

While all equity asset classes earned between 16% and 22% for the year, the top performers were small and value stocks throughout the globe.  The strong returns of 2012 helped to earn respectable 10-year returns for stocks, which ranged between 7% and 17%.  However, if you’re only looking at stock returns over the last 4-8 years (similar to the middle column above), things don’t look so rosy L.  This is what makes investing so emotionally difficult!  In most decades, there might only be a few short periods when you get the majority of the return.  Therefore, it sometimes requires a lot of patience to endure the periods of less-than-exciting returns before your long-term, annualized returns look good.

Throughout 2012, nervous investors did not have to look hard for reasons to avoid the financial markets. The daily headlines provided abundant gloom to feed their doubts, but investors who acted on impulse could have missed a potential opportunity to participate in strong returns across the global financial markets.

The year opened with lingering concern about the weak US recovery, the debt crisis in Europe, and political uncertainty around the world. Many financial pundits had predicted another lackluster year for stocks and more market volatility. Some predicted a euro zone breakup triggered by impending debt defaults in Greece and Portugal. The global economy was showing early signs of a slowdown, and many investors were weighing the potential economic impact of the US elections and so-called “fiscal cliff.”

Every year brings its share of surprises. Perhaps the biggest surprise of 2012 was the strength in stock and bond prices around the world despite a steady stream of discouraging news events.  Once again, we are reminded of how impossible it is to predict the timing of returns based on the events that are happening around us.  So, rather than trying to time the markets and pick stocks, the best investment strategy is to combine global diversification with regular rebalancing.

Now, since tax time is approaching, we have included several important tax-related documents in this quarterly mailing. First, for clients who do not pay our fees from an IRA account, I have provided a report that shows the fees you paid Sparrow Wealth Management in 2012. Second, for clients with taxable gains or losses in a brokerage account, I have provided a Realized Gains and Losses report, which shows the net proceeds and cost basis for taxable securities that were sold during 2012. Make sure that you give these reports to your accountant or tax preparer. We will send these reports to your accountant if we have a signed permission form on file.  For those clients who have not signed this form yet, we have included a blank one for you to sign and return.

In December 2012, we launched the Sparrow Wealth Management online vault, which provides a secure location for all of your financial, tax, and estate documents. So far, only a third of our clients have logged into the vault using the username and password that we sent via email. For those of you who haven’t logged in yet, please do so soon! We hope to use this vault to send your quarterly bills and reports in the very near future (eliminating the need to do this hard copy mailing), but we want to make sure that everyone is logged in and comfortable using the vault first.  The vault can be located at https://sparrowwealth.sharefile.com/.
Finally, we want to thank all of our clients for a wonderful 2012!  We continue to grow on the East and West coasts…thanks in large part to a steady stream of client referrals.  In 2012, our assets under management grew by approximately $5 million, and we hope to continue that trend in the coming year.  As always, please feel free to call or email anytime.
Happy New 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.