Client Letter – Q4 2015

During the past year, the best performing asset classes were international small stocks and REITs (real estate). US stock returns ranged from -8% to 2%. Emerging markets lost about 16%! The following chart shows the 3-month, 1-year, and 3-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, 2015

 DFA Fund / Index 3 Month Return 1 Year Return* 3 Year Return*
S&P 500 Index7.041.3815.13
DFA U.S. Large Value5.15-3.4914.23
DFA U.S. Small2.71-3.2912.83
DFA U.S. Small Value1.89-7.8110.75
DFA Real Estate (REITs)7.143.2411.13
DFA Int’l Large3.14-2.863.57
DFA Int’l Large Value2.85-6.312.37
DFA International Small5.285.918.14
DFA Int’l Small Value4.033.999.36
DFA Emerging Markets-0.48-15.81-7.10
DFA 5-Year Global Bonds-0.601.451.30
DFA Inflation Protected Bonds-1.12-1.22-2.52

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

To say that 2015 was a difficult year for investors would be putting it mildly. It was a lousy year! We are glad to get out of it with minor losses in the wake of a global rout in commodities, currencies, and Chinese stocks. Some markets fell 20% or more; Chinese stocks fell as much as 48% at one point in late summer. That decline reverberated throughout emerging markets and oil fell to a new multi-year low.

Things were a little better in the United States, where the Standard & Poor’s 500 Index lost about 1% and the Dow Jones Industrial Average lost 2%. We think The Global Dow Index is a better stock market gauge for a diversified portfolio: It fell 7% for the year. Fortunately, our stock market losses did not wreck our portfolios, because we were able to make money on short term bonds, real estate, and small international stocks.

If you want to feel better about your portfolio’s performance in 2015, compare it to where a lot of the ‘smart’ money was invested last year: in some of the most popular hedge funds, where rich investors pay large fees for access to the ‘brightest’ minds in the investment community. Those fees weren’t worth it. Well-known hedge funds such as Pershing Square, Greenlight Capital, and Glenview Capital Management racked up losses ranging from 17% to 20%.

As we’ve said time and again, past market fluctuations tell us nothing about the future. Whether markets (and which markets) will rise or fall in 2016 depends on events that haven’t yet occurred and news that cannot be predicted. As we write this, the Chinese stock market has taken a big hit and global stocks are falling. However, the first trading week of the year tells us nothing useful about what comes next.

We remain confident in the academic investment research that shows a diversified portfolio will give you a real return after inflation over a period of years. It may not do so next month or this year, but your investment goals are not that short. If they are you should have all your money in the bank. Most of us need to fund long-term goals, like college, or a new house, or a long retirement. To achieve those goals you need to get positive returns over long periods of time, and to avoid suffering any permanent loss of capital. Instead of focusing on 2015 losses, look at your investment return over the last five years. Consumer inflation averaged 1.74% per year during that period. If your return was better, you had a real profit. If you had your money in the bank over the last five years at a rate of less than 1.74%, you actually lost money in real terms.

Rather than worry about daily market fluctuations, there are positive steps you can take to influence your long-term financial success. Maintain an emergency fund. Buy insurance to protect against catastrophic losses. Save regularly if you are working. Control your expenses. Do what you can ‘within reason’ to minimize your income taxes. We stand ready to help you in all of those areas, and you can give us a head start by providing a copy of your income tax returns when you finish them this spring. We use your tax return information to help you plan investment purchases and sales and deposits to, and withdrawals from, retirement accounts.

Now, since tax time is approaching, we would like to go over where you can find your tax documents. You will receive your 1099s from TD Ameritrade or you can download them from TD Ameritrade’s website.  Note: SWM does not have your 1099s, nor will they be posted to your eMoney vault, since they are already on TDA’s website.  For clients who pay our fees from a taxable brokerage account or from their checking account (NOT from an IRA or Roth IRA), we have posted a “Tax Info” document to your eMoney vault in the “Taxes” folder.  Make sure that you give this report to your tax preparer, along with your 1099 from TD Ameritrade.  If you would like for SWM to provide the “Tax Info” document (NOT the 1099) to your tax preparer, please email us permission and we will be happy to do so.
Finally, we want to thank all of our clients for an amazing 2015!  We appreciate your referrals, which made 2015 our best growth year so far.  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!

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.