During the past year, the best performing asset classes were REITs (real estate) and U.S. large stocks. International stocks were all down between -1% and -7%. 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, 2014
|DFA Fund / Index||1 Year Return||5 Year Return*||10 Year Return*|
|S&P 500 Index||13.69||15.45||7.67|
|DFA U.S. Large Value||10.07||17.02||8.10|
|DFA U.S. Small||4.44||17.35||8.82|
|DFA U.S. Small Value||3.48||16.77||7.92|
|DFA Real Estate (REITs)||31.11||16.97||8.14|
|DFA Int’l Large||-5.24||5.24||4.64|
|DFA Int’l Large Value||-6.99||4.19||4.59|
|DFA International Small||-6.30||8.28||6.68|
|DFA Int’l Small Value||-4.99||8.43||7.10|
|DFA Emerging Markets||-1.71||2.68||8.55|
|DFA 5-Year Global Bonds||2.87||3.39||3.60|
|DFA Intermediate Gov’t Bonds||5.18||4.25||4.76|
*Note: Returns for periods greater than 1 year are annualized. Top 3 returns are in bold.
The wide divergence between large U.S. stocks, real estate, and just about every other investment market made for a difficult year in 2014. Diversified investors did not keep up with the Dow Jones Industrial Average or the S&P 500 Index. Weak international markets, a rapidly rising U.S. dollar, and plunging oil prices dragged down diversified portfolios in the second half of 2014.
The S&P, up 13.69% for the year, was a poor indicator of the average portfolio’s performance. To really understand what happened last year, you have to look at the Dow Jones Global Index, which covers stocks in the United States and 47 other countries. It gained just 2% for the year (Subtract U.S. market performance from that index and it lost 5.5%). Small U.S. value stocks eked out a 3.5% gain. Cash paid nothing and 5-year global bonds gained less than 3%.
The old saying goes “Diversification works, even when you don’t want it to.” Over time a diversified portfolio should offer a less volatile, more consistent return that may even beat the Dow and other large stock indexes in some years. It has worked in the past for us (consider the bear markets of 2008 and 2000-02) and we expect that to continue in the future.
We like to invest at bargain prices because we find that works well over time. This year the prices of big U.S. stocks do not appear to be bargains, while bonds and international stocks have attractive prices. Current conditions will inevitably change, and when they do our portfolios are well-positioned to profit from future growth in foreign markets, small stocks, and fixed income.
Your job as an individual investor is not to beat popular market indexes over short periods of time. Instead, you want to grow your portfolio consistently and with the least risk possible over the long haul. We think a diversified portfolio that is regularly rebalanced offers you the best chance of meeting those goals. As always, please feel free to call if you ever have questions about our investment strategy.
Now, since tax time is approaching, we have included just one tax-related document in this quarterly mailing. For clients who pay our fees from a taxable brokerage account (NOT an IRA), we have provided a report that shows the fees you paid Sparrow Wealth Management in 2014. Make sure that you give this report to your tax preparer, unless you have authorized us to email it to them. You are responsible for giving your 1099(s) from TD Ameritrade to your accountan
Finally, we want to thank all of our clients for a wonderful 2014! We appreciate your referrals, and we hope to continue our growth in 2015. We want to remind everyone that you can keep up with our thoughts on the markets, investing, and financial planning through multiple outlets. Our website home page lists the most recent updates from our blog and “in the news” areas. You can follow us on Twitter at @sparrowwealth. We are also on Facebook and LinkedIn. Please feel free to call or email anytime.
Happy New 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.