A quick period of readjustment over the last six weeks depressed portfolio returns in the second quarter, but we think the markets are now more realistically priced and may be poised to resume their upward momentum later this year. 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 June 30, 2013
| DFA Fund / Index | 3 Month Return | 5 Year Return* | 10 Year Return* |
| S&P 500 Index | 2.91 | 7.01 | 7.30 |
| DFA U.S. Large Value | 3.96 | 7.63 | 9.06 |
| DFA U.S. Small | 4.16 | 11.49 | 10.62 |
| DFA U.S. Small Value | 3.50 | 10.34 | 11.21 |
| DFA Real Estate (REITs) | -1.49 | 7.71 | 10.64 |
| DFA Int’l Large | -1.43 | -0.56 | 7.71 |
| DFA Int’l Large Value | -0.04 | -1.12 | 8.97 |
| DFA International Small | -2.25 | 2.30 | 10.83 |
| DFA Int’l Small Value | -2.26 | 2.28 | 11.39 |
| DFA Emerging Markets | -8.38 | 1.25 | 13.80 |
| DFA 5-Year Global Bonds | -1.59 | 4.25 | 3.44 |
| DFA Intermediate Gov’t Bonds | -3.28 | 5.29 | 4.45 |
*Note: Returns for periods greater than 1 year are annualized. Top 3 returns are in bold.
For the quarter, U.S. stocks performed much better than real estate or international stocks. Since our client portfolios have an equal weighting of international and U.S. stocks, our portfolios did worse than the overall U.S. market this quarter. Nevertheless, our long term (10 year) returns have benefited greatly by having a healthy weighting of international exposure. As the chart above shows, the 10 year returns for international stocks and emerging markets were slightly higher than for U.S. stocks. The key to success is to avoid comparing your portfolio to a particular geographic market in the short term, since we are focused primarily on your long term returns. Every geographic area will have their day in the sun, so to speak!
Bonds were also down for the first time in a while. Talk of an eventual end to the Federal Reserve’s massive bond-buying program spooked bond traders. They pushed interest rates up and bond prices down. Stocks and real estate fell along with bonds. In the last week of the quarter, the markets seemed to realize that the selling might have been overdone and they recovered some of their earlier losses.
These short-term fluctuations are to be expected whenever interest rates reach a turning point. However, we are optimistic as we watch basic economic indicators that keep pointing to an economic recovery. Rising real estate prices and corporate profits had helped stocks hit record highs just before the June sell-off. Most indicators point to continuing economic and corporate gains, which may push stock prices higher over the rest of the year.
We don’t find it profitable to try to anticipate these fluctuations. It is impossible to time them with any accuracy. Selling investments and then buying them back entails transaction fees and capital gains taxes. Instead we find that regular rebalancing of portfolios does add value. Regular rebalancing forces us to sell high and then reinvest in other assets whose prices are low. Traders who react to market movements, on the other hand, always seem to be selling low (after prices have fallen) and then buying back in when prices are higher (after markets have recovered). This activity hurts traders, but it helps the mutual funds we invest in because they can use these opportunities to add cheap stocks and bonds to their portfolios when the traders are selling, and they can sell overpriced assets when those traders are buying.
Meanwhile, we want to make a special mention of gold. As some of you know, we are not fans of gold as an investment. We said so over the last two years as gold soared ever higher and there was so much talk about it being a “store of value” against the depreciation of the U.S. dollar. How times have changed! Gold hit an all-time high of about $1,800 an ounce in 2011. It started this year at $1,682 an ounce, and ended June down 27 percent for the year to date, at $1,224. Meanwhile, the U.S. dollar has appreciated. We continue to think gold is a fad and that it is impossible to put a rational price on it.
Let’s shift gears to what may be the safest and most important fixed income asset you own: your right to Social Security benefits. As more retirees live into extended old age it is becoming apparent that maximizing your benefit for those later years is vital to retirement success. Please do not make any hasty decisions to begin claiming your benefit at retirement without consulting with us first. We can help you decide when and how to claim to make the most of your benefit.
Thank you for your continued trust and confidence. As always, please don’t hesitate to call if you need to discuss something or you?re just worried about the markets—that’s what we are here for.
Enjoy your summer!
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.
