During the past quarter, U.S. and international stocks performed exceptionally well, with international and emerging markets doing the best (as they have during the last ten years). Ironically, U.S. stocks have outperformed international stocks during the last one year and five year periods. The following chart shows the 3-month, 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, 2012
| DFA Fund / Index | 3 Month Return | 5 Year Return* | 10 Year Return* |
| S&P 500 Index | 12.59 | 2.01 | 4.12 |
| DFA U.S. Large Value | 13.06 | -.67 | 5.19 |
| DFA U.S. Small | 12.66 | 3.40 | 7.47 |
| DFA U.S. Small Value | 13.39 | 0.07 | 8.24 |
| DFA Real Estate (REITs) | 10.61 | -.44 | 10.36 |
| DFA Int’l Large | 10.99 | -2.60 | 5.97 |
| DFA Int’l Large Value | 11.34 | -4.27 | 8.19 |
| DFA International Small | 14.46 | -1.34 | 11.76 |
| DFA Int’l Small Value | 16.72 | -2.66 | 12.74 |
| DFA Emerging Markets | 13.63 | 5.38 | 14.73 |
| DFA 5-Year Global Bonds | 1.47 | 4.68 | 4.69 |
| DFA Intermediate Gov’t Bonds | -.46 | 7.06 | 6.43 |
*Note: Returns for periods greater than 1 year are annualized. Top 3 returns are in bold.
While it is nice to see such an amazing quarter, we are still digging out of the negative returns we experienced last year, so the one year returns for most clients are near zero. The important thing to remember is that while portfolio returns do fluctuate a lot during shorter periods (less than 10 years), they generally approach their long term averages over 10-20 years. Those clients who have been with Sparrow Wealth Management ten years or more will notice that your long term returns look very similar to the average return of the asset classes in the 10 year column above (depending, of course, on how much equity versus fixed income you have).
The last 12 years have been rough for investors, subjecting them to two major bear markets and returns well below the previous 18-year bull market run. Now they want to know what to expect over the next decade. Will the golden years of 14 percent-plus annual returns of the 1980s and 1990s reappear? Or will we face another miserable decade of lousy returns punctuated by frightening downdrafts?
Investors who are looking for happy days to return may have to adjust their expectations a little, but on the whole a balanced portfolio of stocks and bonds has at least a 70 percent chance of earning respectable profits, says the giant mutual fund company The Vanguard Group. “The likelihood that the average returns on a 50% equity / 50% bond portfolio over the next ten years will exceed those of the past 10 years is approximately 70 percent,” it said after conducting a study of prospective investment returns. Vanguard expects returns on this portfolio to range from 4.5% to 6.5% a year. That is lower than the stock market’s long-term average, but compares favorably to inflation, leading to real inflation-adjusted growth of 3.5 percent to 4.5 percent per year. The historical premium over inflation for such a portfolio has been about 5.1 percent, Vanguard said.
“Overall, we find that the expected risk/return trade-offs among stocks and bonds do not warrant abandoning the basic principles of portfolio construction—balance, diversification, and a strategic allocation based on long-term goals,” Vanguard said. Vanguard did 10,000 simulations of possible stock and bond market returns over the next 10 years, based on market conditions as of Sept. 30 of last year. “Our simulations suggest that the average return on a broad stock portfolio is likely to be higher than that for a broad bond portfolio given current equity valuations and as compensation for investors bearing greater equity-market risk,” Vanguard said.
Although that might surprise investors who worry about ongoing economic headwinds, Vanguard notes that stock market valuations were at relative bargain levels in September, while bond market valuations were extremely high due to unprecedented low interest rates. However, that does not mean that investors should give up on bonds altogether and invest solely in stocks. Such a move might bring higher returns, but also offers much greater downside risk, Vanguard said. Despite current low interest rates, it expects investors will profit from “the beneficial role that bonds should be expected to play in a broadly diversified portfolio despite their present low yields and regardless of the future direction of interest rates.”
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 are 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 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.
