During the past quarter, U.S. stocks and real estate performed exceptionally well, followed by moderate returns internationally. Short and intermediate bonds remained flat. Isn’t it interesting that U.S. and international stocks performed so well, despite the havoc caused by the earthquake and tsunami in Japan? 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 March 31, 2011
| DFA Fund / Index | 1 Year Return | 5 Year Return* | 10 Year Return* |
| S&P 500 Index | 15.64 | 2.62 | 3.29 |
| DFA U.S. Large Value | 19.59 | 2.18 | 6.07 |
| DFA U.S. Small | 29.17 | 4.24 | 9.59 |
| DFA U.S. Small Value | 27.26 | 2.55 | 11.48 |
| DFA Real Estate (REITs) | 24.49 | 0.97 | 11.26 |
| DFA Int’l Large | 11.79 | 2.25 | 5.78 |
| DFA Int’l Large Value | 13.48 | 2.66 | 9.26 |
| DFA International Small | 22.51 | 4.07 | 12.70 |
| DFA Int’l Small Value | 18.71 | 3.54 | 14.29 |
| DFA Emerging Markets | 19.91 | 11.48 | 17.01 |
| DFA 5-Year Global Bonds | 3.69 | 4.58 | 4.47 |
| DFA Intermediate Gov’t Bonds | 5.15 | 6.55 | 5.94 |
*Note: Returns for periods greater than 1 year are annualized. Top 3 returns are in bold.
As shown above, the top returns during the past year were in U.S. small growth and small value stocks, followed by real estate investment trusts and U.S. large stocks. International and emerging markets stocks were lower—but still very strong—with returns in the 11%-22% range. Clearly, the market recovery since 2008 looks better over the last 10 years than it does over the last five years. In addition, it is easy to see how much better a diversified portfolio performed over the last 10 years than one focused only on the S&P 500.
A silent killer of wealth is once again stalking the land, and it isn’t Bernie Madoff: it is the old nemesis of investors and savers, inflation. Inflation has been remarkably subdued since 2001, running at a 2.3 percent annualized rate as measured by the Consumer Price Index. Since the recession that began in Dec. 2007 (and ended in June 2009) inflation has been even more subdued at only 1.4 percent per year. But recent months have seen ominous double digit increases in energy costs, along with rising food costs. The CPI increased by one-half of one percent in February. It is currently rising at an annual rate of 2.1 percent, higher than the 1.5 percent increase during the 2010 calendar year.
Inflation eats at every financial instrument, but no one is hurt more than those who have fixed rate investments, such as bonds or savings instruments like certificates of deposit and bank savings accounts. The Federal Reserve continues to hold short-term interest rates at artificially low levels as it waits for the lagging job market to recover from the recession. Millions of jobs were lost and the recovery has been agonizingly slow.
But savers who are getting 0.5 percent on their savings accounts or 1 percent (if they are lucky) on their one-year CDs are literally watching a portion of their savings go up in smoke day after day. Once they are done paying income taxes on their paltry interest earnings their savings accounts are shrinking in terms of real buying power. This is a real, permanent loss. If their money was invested in the stock market and the market lost ground, they could wait out the decline and see their principal recover and grow again as the market recovers. But fixed income purchasing power losses are real and can only be made up if a period of deflation ensues.
Retirees often seem to fear the stock market due to its large fluctuations. But inflation is a far greater risk for them, says William Goetzmann, a finance professor at Yale University. “If you put all your money into bonds when you retire because you think they are safe, but then the governments of the world decide that inflation is the only way out of their current predicament, that will come right out of your savings,” he says.
Stocks are the best tool we have for long-term inflation protection. In the short-term they may not work as inflation hedges: The Standard & Poor’s 500 Index lost 0.5 percent annually on an inflation adjusted basis from 1999 through 2010. However, short term savings didn’t do so well either: One-month U.S. Treasury bills gained only 0.2 percent annually after inflation. But the S&P did a much better job over longer periods. For instance, it gained 6.5 percent a year after inflation from 1989 through 2010, and 7.5 percent a year from 1979 through 2010, after adjusting for inflation.
Now, in order to comply with the provisions of the Gramm-Leach-Bliley Act, we are enclosing a copy of SWM’s Privacy Statement for your review. The Privacy Act requires that we deliver this to every client on an annual basis. In addition, we have enclosing a copy of our Form ADV Part 2, as required by the SEC’s new law. This is a change from the prior requirement, where we just had to “offer” it to clients on an annual basis. Form ADV Part 2 is also available on the “Regulatory Compliance” page on our website (www.sparrowwealth.com).
Thank you for your continued trust and confidence. Feel free to reach out if you need anything.
Sincerely,
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.
