During the past quarter and year, the best performing asset classes were bonds and real estate. The 10-year returns below show how small of an impact this market decline has had on long term returns. The following chart shows the 3-month, 1-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, 2018
|DFA Fund / Index||3 Month Return||1 Year Return||10 Year Return*|
|S&P 500 Index||-13.52||-4.38||13.12|
|DFA U.S. Large Value||-14.72||-11.65||13.17|
|DFA U.S. Small||-20.15||-13.13||13.39|
|DFA U.S. Small Value||-20.28||-15.13||12.05%|
|DFA Real Estate (REITs)||-5.15||-2.99||12.41%|
|DFA Int’l Large||-13.29||-14.14||6.16%|
|DFA Int’l Large Value||-14.63||-17.49||6.11%|
|DFA International Small||-16.54||-19.42||9.53%|
|DFA Int’l Small Value||-17.91||-23.31||8.71%|
|DFA Emerging Markets Core||-6.39||-15.25||8.77%|
|DFA 5-Year Global Bonds||1.24||1.68%||2.80%|
|DFA Inflation Protected Bonds||-0.03||-1.29||3.73%|
*Note: Returns for periods greater than 1 year are annualized. Top 3 returns are in bold.
The global stock market declined significantly in the fourth quarter as investors were concerned about an economic slowdown in 2019. The S&P 500 lost 14% this quarter, while the tech heavy Nasdaq lost 18%. Meanwhile, the bond market rallied strongly, which is a great reminder of why we own bonds—to provide a cushion during the inevitable stock market downturns. Not only do your bond holdings provide a stabilizing force as stocks go down, but they also provide a place for us to get money should you need a withdrawal without being forced to sell stock funds at low prices. This should provide comfort for those who have ongoing withdrawals or need a one-time infusion of cash.
We caution you to not lose focus on the long term. It’s never easy to see your portfolio temporarily decline, but this is a natural part of investing. Those who stay disciplined, stick with their investment plan, and hold on tend to be rewarded when the inevitable recovery happens. We have seen this many times before, most recently during the spring of 2016, summer of 2015 and fall of 2011. The alternative option of selling out of stocks and getting back in when things look better is not an attractive choice. It has been shown, and we’ve seen in real life, that it is nearly impossible to time the market.
Even the Oracle of Omaha, Warren Buffett, has said “I never have an opinion about the market because it wouldn’t be any good.” He also added “the best thing that can happen from Berkshire’s standpoint…over time is to have markets that go down a tremendous amount.” He said that because he is one of the most disciplined investors the world has ever seen and fully intends on taking advantage of lower stock prices. We agree. Lower stock prices cause short-term pain, but long-term opportunity for investors. As we have in the past, if your portfolio drifts far enough out of line, we will rebalance to bring it back in line. Typically, this is a risk-management strategy, but in times where the stock market is down significantly it can end up improving returns as well.
We urge you to focus on what you can control—your current rate of savings, your current rate of spending, and your investment behavior. Your behavior will always be the most important driver of your investment success. We also suggest you limit the amount of financial news you consume, especially as this is the time of the year where every pundit makes their 2019 predictions. Some predictions will be positive, some will be negative, but all of them will mean very little, or nothing, to your personal situation. Your current investment plan is custom made to match your financial plan and no prediction about the next 12 months should change that.
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. Also new for 2018 is that client fees are no longer tax deductible on your tax return, so we will not be doing the fee report this year or going forward. This change was part of Trump’s new tax law overhaul. As a reminder, if you have changed your tax preparer, please fill out a new consent form so that we can request your tax returns be sent to us.
We encourage you to visit our website http://www.sparrowwealth.com for ongoing commentary and timely blogs we write about the markets and other financial topics. You can also see our posts on Twitter (@sparrowwealth), Facebook (@SparrowWealthManagement), 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. Thank you for your business and your trust. We greatly appreciate it.
Happy New Year!
About Christopher M. Jones, CFP®
Christopher M. Jones is the Founder and President of Sparrow Wealth Management, a fee-only financial planning and investment management firm based in Hermosa Beach, CA. 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. Chris is a CERTIFIED FINANCIAL PLANNERTM practitioner.