Client Letter – Q4 2016

During the past year, the best performing asset classes were U.S. large value, small, and small value stocks. Emerging markets stocks were next, just ahead of the S&P 500. The following chart shows the 1-year, 3-year, and 5-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, 2016

DFA Fund / Index1 Year Return3 Year Return*5 Year Return*
S&P 500 Index11.968.8714.66
DFA U.S. Large Value18.898.0916.68
DFA U.S. Small23.537.6616.00
DFA U.S. Small Value28.266.9616.22
DFA Real Estate (REITs)8.3813.6311.81
DFA Int’l Large3.16-1.716.18
DFA Int’l Large Value8.41-1.886.28
DFA International Small5.801.649.72
DFA Int’l Small Value8.002.1911.55
DFA Emerging Markets Core12.35-1.772.14
DFA 5-Year Global Bonds1.792.042.09
DFA Inflation Protected Bonds4.672.240.82

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

Last year taught investors that getting worked up over short-term market declines isn’t worth the effort. U.S. stocks began the year by falling dramatically on the first day of trading and continued downward through February. The nearly 10% correction was unnerving, especially for investors who heed investment folklore that claims the market’s action at the beginning of the year predicts its outcome for the year as a whole.

That old adage certainly didn’t hold up in 2016. By April the market had righted itself and went on to gain 11.96% for the year, as measured by the Standard & Poor’s 500 Index. Our investment strategy of tilting towards value and small stocks paid off, as both asset classes did even better than the market as a whole.

There were some headwinds, however. Domestic interest rates rose sharply toward the end of the year and pushed up the value of the dollar. That hurt international developed markets: stocks in major European and Asian countries failed to keep up with U.S. stocks. The exceptions were stocks in emerging markets, which managed to beat the S&P 500 Index.  Bonds were hurt by rising interest rates and offered low single-digit returns.

As always, the research is clear that we should not use predictions, our own or anyone else’s, to make investment decisions. It is better to put together a well-diversified portfolio and to stick with it. But there is something else we don’t often pay attention to: we place too much emphasis on investment returns. Our savings habits—that is, our propensity to put money away for a future goal—will affect our ability to reach that goal much more than the investment returns we earn on those savings.

Here is one easy way to increase your savings this year: Raise the percentage of your paycheck that gets deposited to your retirement savings plan at work. Even better, any time you get a salary increase, increase your retirement contribution. Eventually you will reach the maximum amount that your plan allows you to save each year. The same advice goes toward saving for any long-term goal, such as a college education or a house. Doing this puts you in control of how quickly you will reach your goal. Incidentally, once you enter retirement, your decisions on how much to spend from your portfolio—rather than the money you earn on your investments—will determine your success. Think of it as the reverse of saving for retirement: more saving equals a larger retirement fund, while less spending equals more years of income from your portfolio.

Now, since tax time is approaching, we would like to go over where you can find your tax documents. You will receive your 1099s directly from TD Ameritrade, or you can download them from TD Ameritrade’s website.  Please note that we do not have your 1099s.  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.  We are happy to provide the “Tax Info” document to your tax preparer, as long as we have a signed consent form on file.  Please fill out a new consent form if you change your tax preparer.

Just to let you know, we have changed the performance reports back to showing the “internal rate of return” (IRR), instead of the “time weighted return” (TWR).  Feel free to reach out if you have any questions about this change.

Thank you for making 2016 our best year ever!  We have eliminated our investment minimums, making it easier to refer your friends and family.  We also offer a discounted “base” fee to the children of our clients.  If you haven’t done so, please check out our revamped website: www.SparrowWealth.com.  You can follow us on Twitter (at @sparrowwealth), Facebook, Google, and LinkedIn.

As always, please don’t hesitate to call or email if you want to discuss something or you’re worried about the markets—that is what we’re here for.

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.

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