During the past quarter, the world-wide equity markets took a steep fall. In contrast, our bond positions did their job and held up the “fort.” The chart below 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 September 30, 2011
| DFA Fund / Index | 3 Month Return | 5 Year Return* | 10 Year Return* |
| S&P 500 Index | -13.87 | -1.18 | 2.82 |
| DFA U.S. Large Value | -21.47 | -3.69 | 4.40 |
| DFA U.S. Small | -21.91 | .21 | 7.33 |
| DFA U.S. Small Value | -24.07 | -2.86 | 8.39 |
| DFA Real Estate (REITs) | -14.39 | -2.83 | 9.01 |
| DFA Int’l Large | -20.14 | -2.83 | 5.15 |
| DFA Int’l Large Value | -23.06 | -3.79 | 7.72 |
| DFA International Small | -19.51 | -.35 | 11.13 |
| DFA Int’l Small Value | -21.72 | -1.77 | 11.91 |
| DFA Emerging Markets | -22.66 | 5.86 | 16.00 |
| DFA 5-Year Global Bonds | 2.13 | 4.95 | 4.55 |
| DFA Intermediate Gov’t Bonds | 5.37 | 7.41 | 6.11 |
*Note: Returns for periods greater than 1 year are annualized. Top 3 returns are in bold.
While it is tempting to feel a bit depressed after looking at these quarterly returns, it is important to stay focused on the “big picture.” Despite the three serious market “drops” since 2001, the ten-year annualized returns for equities still ranges between 2.82% (S&P 500) and 16% (emerging markets). Surprisingly, the international markets made it possible for a diversified, moderate risk portfolio to net a 6% or 7% annualized return over last decade (including this terrible quarter). However, the returns on most investment and savings vehicles are still far below their long-term averages, and markedly lower than they were from 1980 through 1999. We fully expect the equity markets to rebound eventually, once this cloud of fear and anxiety that has permeated the stock markets subsides.
Unfortunately, the outlook for savers is especially bad: The Federal Reserve’s recent pledge to keep short-term rates at nearly zero for the next two years will probably mean that there will be no pickup in rates paid on bank savings, money market funds, or U.S. Treasury securities. Those who like to sock their money away in the bank probably will not enjoy any return over the next few years. In fact, they may end up losing purchasing power. Average rates in savings accounts and certificates of deposit currently are less than 0.2 percent per year. The Fed says that’s where they will stay into 2013. Meanwhile, consumer inflation averaged 3.8 percent in the 12 months ended in August. Savers actually lost money by keeping it in the bank. To add insult to injury, many paid income taxes on their meager interest.
On the other hand, we feel that investors with diversified portfolios have plenty to hope for: we have seen slow periods like this in the past and they have always been followed by years with above-average returns. From the beginning of 2000 through the end of 2010, the Standard & Poor’s 500 Stocks Average gained just 0.4% per year on a compounded basis, compared to its long term average (since 1926) of 9.9 percent per year. The S&P 500 did even better from 1980 through 1999, when it gained 17.9 percent per year. The last decade’s results are just a hair better than the Great Depression: the S&P 500 lost 1 percent per year from 1930 through 1940. But each decade from 1940 through 1999 offered positive returns on stocks, until this century, which has suffered so far through two major bear markets (just like the market did in the Depression, when stocks fell from 1929 through 1932 and again from 1937 through 1942). The market’s behavior since the Depression offers hope to today’s investors that stock returns could pick up over the next decade.
Now, we have some exciting news to share about Sparrow Wealth Management and our transition to TD Ameritrade! First, we are very happy to report that the custodial move is 100% complete as of the quarter end. This was a huge project, and we are very grateful to each of our clients for your diligence in returning all of the forms in a timely manner. Second, we are happy to confirm that no clients were lost in the shuffle, and we were very impressed with TD Ameritrade’s high level of service and their prompt attention to our clients’ concerns. Third, we have provided each of you with your online login info for TD Ameritrade’s client web portal (www.advisorclient.com). If you need the login info resent or you cannot log in, please feel free to call or email Debbie. If you would like help with navigating your accounts online, we strongly recommend calling TD Ameritrade’s tech support group at (800) 431-3500, Ext. 3. Finally, the new address for making deposits to your TD Ameritrade accounts is:
TD Ameritrade
Attn: Cash Management
4075 Sorrento Valley Blvd, Suite A
San Diego, CA 92121
Don’t forget to make your deposit checks payable to “TD Ameritrade” and to put your account # in the memo section of the check. We should be getting pre-addressed deposit envelopes soon, so please let us know if you would like a few mailed to you. Thank you again for your continued trust and confidence. We look forward to working with you for many years to come.
Happy Halloween!
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.
